Question

A consumer consumes only two goods X and Y whose prices are Rs 4 and Rs 5 per unit respectively. If the consumer chooses a combination of the two goods with marginal utility of X equal to 5 and that of Y equal to 4, is the consumer in equilibrium? Give reason. What will a rational consumer do in this situation? Use utility analysis.

Answer 1

The consumer reaches equilibrium only if the following condition is satisfied

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

Given that

`MU_x/P_x = 5/4`

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