Question

A consumer consumers only two goods A and B and is in equilibrium. Show that when price of good B falls, demand for B rises. Answer this question with the help of utility analysis.

Answer 1

Initially, equilibrium requires 

\[ \frac{\mathrm{MU}_A}{\mathrm{P}_A}=\frac{\mathrm{MU}_B}{\mathrm{P}_B} \]

When the price of B falls, its marginal utility per rupee rises, so the equality is disturbed. The consumer buys more B and less A. As B consumption increases, its MU falls; as A consumption decreases, its MU rises. The adjustment continues until the ratios become equal again. Therefore, the consumer’s quantity demanded of B rises.