Joe is currently in consumer equilibrium by consuming cheese and crackers, such that the last cracker consumed yielded 8 utils and the last piece of cheese consumed yielded 12 utils. Assume the price of crackers is two cents per cracker and the price of cheese is three cents per piece. If the price of cheese increases to four cents, Joe should his consumption of crackers and his marginal utility from crackers will and also his consumption of cheese and his marginal utility from cheese will .

a. increase; increase; increase; increaseb. increase; decrease; increase; decreasec. decrease; increase; decrease; increased. increase; increase; decrease; decreasee. decrease; increase; increase; decrease

e. decrease; increase; increase; decrease

e. decrease; increase; increase; decrease

Explanation:

In order to understand this, the law of demand and the law of diminishing marginal utility are applied.

Based on the law of demand, the higher the price, the lower the quantity demanded. Therefore, Joe will decrease the quantity of If the price of cheese increases to four cents per piece.

Since the price of cracker still remains at two cents per cracker, Joe will use the money he was spending on cheese before before the increase in price to increase the quantity of cracker.

Based on the law of diminishing marginal utility, holding every other thing constant, at equilibrium, the marginal utility from a good will decrease when the quantity of consumption increases; while the marginal utility from a good will increase when the quantity of consumption decreases.

Therefore, an increase in the quantity of cracker consumed caused by a decrease in the quantity of cheese consumed as a result of the increase in the price of cheese, will make the marginal utility of cracker to fall while the marginal utility of cheese will rise.

Note:

The consumer equilibrium of Joe can be shown as follows:

MU of cracker/Price of cracker =MU of cheese/Price of cheese

8/0.2 = 12/0.3

40 = 40

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