Question

A consumer consumes only two goods X and Y. Marginal utilities of X and Y are 4 and 3 respectively. Price of X and price of Y is Rs 3 per unit. Is consumer in equilibrium? What will be further reaction of the consumer? Give reasons.

Answer 1

In case of two goods, a consumer strikes equilibrium when

`(MU_x)/P_x=(MU_y)/P_y`

Given that

`(MU_x)/P_x=4/3=1.33`

`(MU)/P_y=3/3=1`

Here, `(MU_x)/P_x>(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.