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A consumer consumes only two goods X and Y. Explain the conditions of consumer’s equilibrium using Utility Analysis. |
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Answer» Considering that a consumer is consuming only two goods X and Y, the conditions of consumer’s equilibrium are : (i) \(\frac{MUpx}{px}=\frac{MUy}{py}\) (ii) MU of a good falls as more units of the goods are consumed. If MUx/Px is greater than MUy/Py, it means that the satisfaction a consumer derives from spending a rupee on good X is greater than the satisfaction derived from spending a rupee on good Y. In such situation, a consumer will be motivated to substitute good X for good Y and will relocate his income to satisfy the condition of consumer’s equilibrium. As the consumption of good X increases its marginal utility will fall. As the consumption of good Y decreases, its marginal utility will increase. This is due to the law of diminishing marginal utility. This process will continue till MUx/Px becomes equal to MUy/Py and the consumer is in equilibrium. If MUx/Px is lower than MUy/Py, it means that the satisfaction a consumer derives from spending a rupee on good X is lower than the satisfaction derived from spending a rupee on good Y. In such a situation, a consumer will be motivated to substitute good Y for good X. As the consumption of good Y increases, its marginal utility will fall. As the consumption of good X decreases, its marginal utility will increase. This process will continue till \(\frac{MUx}{px}=\frac{MUy}{py}\) Unless MU of a good falls, as more units are consumed, the consumer will not reach the equilibrium. |
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