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A consumer consumes only two goods X and Y whose prices are Rs 4 and Rs 5per unit respectively . If the consumer choose a combination of the two goods with marginal utility of X equal to 5 and that of Y equal to 4 , is the consumer in equilibrium ? Give reasons. What will a rational consumer do in this situation ? Use utility analysis . |
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Answer» <P> SOLUTION :The utility analysis in the above examination problem is the two commodity consumer equilibrium condition or law of equi - marginal utility . The condition for two commodity consumer equilibrium is ,Marginal utility of last rupee `((MU_x)/(P_x))`Marginal utility of last rupee `((MU_y)/(P_y))` In the above examination problem, `MU_x=5,P_(x)=4`, then `(MU_x)/(P_x) =5/4=1.25` `MU_y=4,P_y=5`, then `(MU_y)/(P_y) = 4/5 =0.8` The above example gives inequality as , `(MU_x)/(P_x) GT (MU_y)/P_y` In MEAS , marginal utility from the last rupee spent on commodity X is more than marginal utility from the last rupee spent on commodity Y. So , to attain the equilibrium consumer must increase the quantity of X, which decrease the `MU_x` and decrease the quantity of Y which will increase the `MU_y` . Increase in quantity of X and decrease in quantity of Y continue till`(MU_x)/P_x = (MU_y)/P_y` . |
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