Question

A consumer consumes only two goods X and Y. If marginal utilities of X and Y are 4 and 5 respectively, and if price of X is Rs 5 per unit and that of Y is Rs 4 per unit is the consumer in equilibrium? What will be 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=4/5=0.8`

`(MU_y)/P_y=5/4=1.25`

Here

`(MU_y)/P_y>(MU_z)/P_z`

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.