Consider a consumer whose Marginal Substitution Ratio between two goods, Y and X

Question

Consider a consumer whose Marginal Substitution Ratio between two goods, Y and X, is always constant. Given some prices and an income, the consumer chooses to consume exclusively good X. From this situation, if the income increases:

a) They will increase both the consumption of X and the Y, in amounts that depend on their preferences.

b) The consumption of X will not change and will consume some amount of good Y.

c) The consumption of X may increase, decrease or not vary, and continue to consume nothing of Y.

d) We can ensure that the consumption of X will increase and will continue without consuming any of Y.

explain

Explanation / Answer

We have a consumer whose Marginal Substitution Ratio between two goods, Y and X, is always constant. This implies X and Y are perfect substitutes and if only good is being consumed, its price must be smaller than the other

Given some prices and an income, the consumer chooses to consume exclusively good X. We infer that price of X is smaller than price of Y so that only X is consumed. From this situation, if the income increases, then the budget line will shift upwards. But since there is no change in price there will be no change in choice as well. Hence income effect is zero and he will use all his increase in income in buying X

Option D is correct

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