A Consumer consumes only two goods X and Y. Marginal utilities of X and Y is 4 and 5 respectively. The prices of X and Y are Rs 4 per unit and Rs 5 per unit respectively. Is the consumer in equilibrium? What will be the further reaction of the consumer? Explain.
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Solution
In case of two goods, a consumer strikes equilibrium when,
`(MU_Z)/P_Z=(MU_Y)/P_Y`
Accourding to the given question:
`(MU_Z)/P_Z=5/4=1.25`
`(MU_Y)/P_Y=4/5=0.8`
Since,
`(MU_Z)/P_Z`
is greater than `(MU_Y)/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.
Concept: Consumer'S Equilibrium
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