Question

Explain the condition of consumer’s equilibrium in case of two commodities. Use utility approach.

Answer 1

Under the utility approach, a consumer is in equilibrium when limited income is allocated to obtain maximum satisfaction.

(i) Single commodity

• The marginal utility of the commodity, expressed in money, equals its price: \[ \mathrm{MU}_X=P_X \]
• Marginal utility diminishes as consumption increases. If MU is above price, buy more; if it is below price, buy less.

(ii) Two commodities

• The marginal utility per rupee is equal for both goods: \[ \frac{\mathrm{MU}_X}{P_X}=\frac{\mathrm{MU}_Y}{P_Y} \]
• Equivalently: \[ \frac{\mathrm{MU}_X}{\mathrm{MU}_Y}=\frac{P_X}{P_Y} \]
• Marginal utility diminishes as consumption of either good increases, and the consumer spends the available income.