A consumer consumes only two goods. Explain consumer's equilibrium wit

1.	A consumer consumes only two goods. Explain consumer's equilibrium with the help of utility analysis.
Answer» Assuming that only two goods the consumer consumes are X and Y, the conditions of equilibrium are: (i) MU_x/P_x= MU_y/P_y =MU_m (ii) MU falls as more is consumed. (a) Suppose MU_x/P_x> MU_y/P_y. The consumer will not be in equilibrium because per rupee MU of X is greater than per rupee MU of Y. This will include the consumer to buy more of X by reducing expenditure on Y. It will lead to fall in MU_x and rise in MU_y. This will continue till MU_x/P_x=MU_y/P_y. (b) Unless MU falls as more of a good is consumed the consumer will not reach equilibrium.

A consumer consumes only two goods. Explain consumer's equilibrium with the help of utility analysis.

Answer»

Assuming that only two goods the consumer consumes are X and Y, the conditions of equilibrium are:

(i) MU_x/P_x= MU_y/P_y =MU_m

(ii) MU falls as more is consumed.

(a) Suppose MU_x/P_x> MU_y/P_y. The consumer will not be in equilibrium because per rupee MU of X is greater than per rupee MU of Y. This will include the consumer to buy more of X by reducing expenditure on Y. It will lead to fall in MU_x and rise in MU_y. This will continue till MU_x/P_x=MU_y/P_y.

(b) Unless MU falls as more of a good is consumed the consumer will not reach equilibrium.

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