Question

Suppose Tim spends his entire income on hot dogs and hamburgers and consumes at least some of both. Now suppose that the price of hot dogs increases while the price of hamburgers remains the same. If Tim is compensated so that his utility is held constant, which of the following must be TRUE?
a. Tim's utility remains the same.
b. Tim is better off than he was.
c. Tim consumes more hot dogs and fewer hamburgers.
d. Tim consumes more hamburgers and fewer hot dogs.

Answer 1

Answer:

D. Tim consumes more hamburgers and fewer hot dogs.

Explanation:

For his utility to remain constant, Tim will neither consume more goods in total, nor spend more money than before.

Therefore, because the price of hot dogs has risen, while the price of hamburger has remained the same, he will now buy more hamburgers and less hot dogs, because eating more hamburgers and less hot dogs will not decrease his satisfaction, it will remain the same. We can also conclude from that both fast food products are perfect substitutes for Tim.