Multiple Choice
Carlos consumes only two goods, apples and bananas. His utility function is U(a, b) = a3b2. Before he trades, his initial endowment is wa apples and wb bananas. After he trades to his optimal consumption point at these prices, the relative prices change. Carlos is allowed to make further trades if he wishes.
A) Carlos will definitely be better off after the price change.
B) Carlos will be better off if the price of the good he was selling goes up and worse off if the price of the good he was selling goes down.
C) Unless the prices of both goods goes down, we cannot tell if Carlos is better off or worse off.
D) Carlos will be better off if the price of the good he was selling goes down and worse off if the price of the good he was selling goes up.
E) Carlos's utility will not be affected by the change.
Correct Answer:
Verified
Correct Answer:
Verified
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