diff --git a/packages/jupyter-ai-magics/jupyter_ai_magics/providers.py b/packages/jupyter-ai-magics/jupyter_ai_magics/providers.py
index 8a28c5251..15402dd96 100644
--- a/packages/jupyter-ai-magics/jupyter_ai_magics/providers.py
+++ b/packages/jupyter-ai-magics/jupyter_ai_magics/providers.py
@@ -55,8 +55,12 @@
 You are not a language model, but rather an application built on a foundation model from {provider_name} called {local_model_id}.
 You are talkative and you provide lots of specific details from the foundation model's context.
 You may use Markdown to format your response.
-Code blocks must be formatted in Markdown.
-Math should be rendered with inline TeX markup, surrounded by $.
+If your response includes code, they must be enclosed in Markdown fenced code blocks (with triple backticks before and after).
+If your response includes mathematical notation, they must be expressed in LaTeX markup and enclosed in LaTeX delimiters.
+- Single dollar signs ($) should never be used as delimiters for inline math.
+- Valid inline math: `\\( \\infty \\)`
+- Valid display math: `\\[ \\infty \\]`
+- Invalid inline math: `$\\infty$`
 If you do not know the answer to a question, answer truthfully by responding that you do not know.
 The following is a friendly conversation between you and a human.
 """.strip()
diff --git a/packages/jupyter-ai/src/components/rendermime-markdown.tsx b/packages/jupyter-ai/src/components/rendermime-markdown.tsx
index 976cccb72..4ecdd8745 100644
--- a/packages/jupyter-ai/src/components/rendermime-markdown.tsx
+++ b/packages/jupyter-ai/src/components/rendermime-markdown.tsx
@@ -24,7 +24,12 @@ type RendermimeMarkdownProps = {
 };
 
 /**
- * Takes \( and returns \\(. Escapes LaTeX delimeters by adding extra backslashes where needed for proper rendering by @jupyterlab/rendermime.
+ * Escapes backslashes in LaTeX delimiters such that they appear in the DOM
+ * after the initial MarkDown render. For example, this function takes '\(` and
+ * returns `\\(`.
+ *
+ * Required for proper rendering of MarkDown + LaTeX markup in the chat by
+ * `ILatexTypesetter`.
  */
 function escapeLatexDelimiters(text: string) {
   return text
@@ -34,6 +39,61 @@ function escapeLatexDelimiters(text: string) {
     .replace(/\\\]/g, '\\\\]');
 }
 
+/**
+ * Type predicate function that determines whether a given DOM Node is a Text
+ * node.
+ */
+function isTextNode(node: Node | null): node is Text {
+  return node?.nodeType === Node.TEXT_NODE;
+}
+
+/**
+ * Escapes all `$` symbols present in an HTML element except those within the
+ * following elements: `pre`, `code`, `samp`, `kbd`.
+ *
+ * This prevents `$` symbols from being used as inline math delimiters, allowing
+ * `$` symbols to be used literally to denote quantities of USD. This does not
+ * escape literal `$` within elements that display their contents literally,
+ * like code elements. This overrides JupyterLab's default rendering of MarkDown
+ * w/ LaTeX.
+ *
+ * The Jupyter AI system prompt should explicitly request that the LLM not use
+ * `$` as an inline math delimiter. This is the default behavior.
+ */
+function escapeDollarSymbols(el: HTMLElement) {
+  // Get all text nodes that are not within pre, code, samp, or kbd elements
+  const walker = document.createTreeWalker(el, NodeFilter.SHOW_TEXT, {
+    acceptNode: node => {
+      const isInSkippedElements = node.parentElement?.closest(
+        'pre, code, samp, kbd'
+      );
+      return isInSkippedElements
+        ? NodeFilter.FILTER_SKIP
+        : NodeFilter.FILTER_ACCEPT;
+    }
+  });
+
+  // Collect all valid text nodes in an array.
+  const textNodes: Text[] = [];
+  let currentNode: Node | null;
+  while ((currentNode = walker.nextNode())) {
+    if (isTextNode(currentNode)) {
+      textNodes.push(currentNode);
+    }
+  }
+
+  // Replace each `$` symbol with `\$` for each text node, unless there is
+  // another `$` symbol adjacent or it is already escaped. Examples:
+  // - `$10 - $5` => `\$10 - \$5` (escaped)
+  // - `$$ \infty $$` => `$$ \infty $$` (unchanged)
+  // - `\$10` => `\$10` (unchanged, already escaped)
+  textNodes.forEach(node => {
+    if (node.textContent) {
+      node.textContent = node.textContent.replace(/(?<![$\\])\$(?!\$)/g, '\\$');
+    }
+  });
+}
+
 function RendermimeMarkdownBase(props: RendermimeMarkdownProps): JSX.Element {
   // create a single renderer object at component mount
   const [renderer] = useState(() => {
@@ -57,19 +117,24 @@ function RendermimeMarkdownBase(props: RendermimeMarkdownProps): JSX.Element {
    */
   useEffect(() => {
     const renderContent = async () => {
+      // initialize mime model
       const mdStr = escapeLatexDelimiters(props.markdownStr);
       const model = props.rmRegistry.createModel({
         data: { [MD_MIME_TYPE]: mdStr }
       });
 
+      // step 1: render markdown
       await renderer.renderModel(model);
-      props.rmRegistry.latexTypesetter?.typeset(renderer.node);
       if (!renderer.node) {
         throw new Error(
           'Rendermime was unable to render Markdown content within a chat message. Please report this upstream to Jupyter AI on GitHub.'
         );
       }
 
+      // step 2: render LaTeX via MathJax, while escaping single dollar symbols.
+      escapeDollarSymbols(renderer.node);
+      props.rmRegistry.latexTypesetter?.typeset(renderer.node);
+
       // insert the rendering into renderingContainer if not yet inserted
       if (renderingContainer.current !== null && !renderingInserted.current) {
         renderingContainer.current.appendChild(renderer.node);