Question

A consumer consumes only two goods X and Y whose prices are Rs 5 and Rs 4 respectively. If the consumer chooses a combination of the two goods with marginal utility of X equal to 4 and that of Y equal to 5, is the consumer in equilibrium? Why or why not? What will a rational consumer do in this situation? Use utility analysis

Answer 1

`The consumer reaches equilibrium only if the following condition is satisfied

`"MU"_x/P_x = "MU"_y/P_y`

Give that

`"MU"_x/P_x = 5/4`

`"MU"_y/P_y = 4/5`

Here `"MU"_x/P_x` is greater than `"MU"_y/P_y`, the rational consumer would try to satisfy the condition by increasing the consumption of Good-X and forego the consumption of Good-Y.