Question

A consumer consumes only two goods X and Y. Marginal utility of each is 2. The price per unit of X and Y is Re 1 and Rs 2 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`

Given that

`(MU_z)/P_z=2/1=2`

`(MU_y)/P_y=2/2=1`

Here

`(MU_z)/P_z>(MU)/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.