Question

A consumer consumes only two goods X and Y. Marginal utilities of X and Y are 5 and 4 respectively. The prices of X and Y are Rs. 4 per unit and Rs. 5 per unit respectively. Is the consumer in equilibrium? What will be the further reaction of the consumer? Explain.

Answer 1

The Consumer is not in equilibrium because :

The consumer will buy more of X and less of Y because per rupee MUx is higher than per rupee MUy and continues to do so till MUx falls and MUx rises enough to make

MUx/Px= MUy/Py

Detailed answer:

Conditions of consumer equilibrium in two commodities are:

(i) Marginal utility of the last rupee of expenditure on each good is the same.

(ii) Marginal utility of a good falls as more of it is consumed.

First condition implies MUx/Px=MUy/Py

(Equimarginal utility)

In the given questiory MUx= 5; MUy=4; Px = 4; Py=5