Question

A consumer consumes only two goods X and Y whose prices are Rs 2 and Rs 1 per unit respectively. It the consumer chooses a combination of the two goods with marginal utility of X being 4 and that of Y also being 4, is the consumer in equilibrium ?Give reasons. Explain what will a rational consumer do in this situation. Use Marginal Utility Analysis.

Answer 1

The consumer reaches equilibrium only if the following condition is satisfied

`"MU"_x/P_x = "MU"_y/P_y`

Give that

`"MU"_x/P_x = 4/2`

`"MU"_y/P_y= 4/1`

Here `"MU"_y/P_y` is greater than `"MU"_x/P_x` the rational consumer would try to satisfy the condition by increasing the consumption of Good-Y and forego the consumption of Good-X.