Question

A consumer consumes only two goods X and Y. Marginal utilities of X and Y is 3 and 4 respectively. Prices of X and Y are Rs 4 per unit each. Is consumer in equilibrium? What will be further reaction of the consumer? Give reasons.

Answer 1

In case of two goods, a consumer strikes equilibrium when

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

Given that

`(MU_x)/P_x=3/4=0.75`

`(MU_y)/P_y=4/4=1`

Here, `(MU_y)/P_y>(MU_x)/P_x`

Thus, if a consumer is not in equilibrium, then the consumer increases the consumption of Good Y and decreases that of Good X to reach the equilibrium.