Question

A consumer consumes only two goods X and Y. State and explain the conditions of consumer’s equilibrium with the help of utility analysis.

Answer 1

A consumer is said to be in equilibrium when he gets maximum satisfaction from the consumption of two commodities, X and Y, and has no tendency to change his consumption.

According to the Law of Equi-Marginal Utility, a consumer reaches equilibrium when the marginal utility per rupee spent on both commodities is equal.

1. Marginal Utility per Rupee Must Be Equal

The marginal utility per rupee spent on commodity X must be equal to that of commodity Y.

\[{\frac{MU_X}{P_X}=\frac{MU_Y}{P_Y}} \]

Where:

\(MU_X\) = Marginal Utility of commodity X

\(MU_Y\) = Marginal Utility of commodity Y

\(P_X\) = Price of commodity X

\(P_Y\) = Price of commodity Y

If \(\frac{MU_X}{P_X}>\frac{MU_Y}{P_Y}\): The consumer will buy more of X and less of Y.

If \(\frac{MU_X}{P_X}<\frac{MU_Y}{P_Y}\): The consumer will buy more of Y and less of X.

If \(\frac{MU_X}{P_X}=\frac{MU_Y}{P_Y}\): The consumer is in equilibrium.

2. Marginal Utility Must Be Diminishing

The marginal utility of both commodities must decrease as their consumption increases. This ensures that the consumer gets maximum satisfaction at the equilibrium point.