Question

A Consumer consumes only two goods X and Y. Marginal utilities of X and Y is 4 and 5 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

In case of two goods, a consumer strikes equilibrium when,

`(MU_Z)/P_Z=(MU_Y)/P_Y`

Accourding to the given question:

`(MU_Z)/P_Z=5/4=1.25`

`(MU_Y)/P_Y=4/5=0.8`

Since, 

`(MU_Z)/P_Z`

is greater than `(MU_Y)/P_Y`

Thus, if a consumer is not in equilibrium, then the consumer increases the consumption of Good X and decreases that of Good Y to reach the equilibrium.