Igor's preferences for coffee (by the pound) and doughnuts (by the dozen), can be characterized as follows:
• Marginal Utility Coffee = MUx = y2
• Marginal Utility Doughnuts = MUy = 2xy
If the ratio of relative prices is (Px/Py) = 6/3 = 2, and Igor's income is $90 per period, what combination of pounds of coffee and dozens of doughnuts will he choose?
Now let the ratio of coffee to doughnut prices decline to unity (=1), holding the price of doughnuts constant. How does Igor respond to the reduction in the relative price of coffee?