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A consumer consumes two goods X and y. Explain what will happen if MUx/Px is greater than MUy/Py? |
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Answer» If MUx/Px > MUy/Py, then it means that satisfaction of the consumer derives from spending a rupee on Good X greater than the satisfaction derived from spending a rupee on Good Y. The consumer will reallocate his income by substituting Good X for Good y. As the consumption of Good X increases the marginal utility derived from it goes on diminishing and reverse proposition occurs for Good y, this process will continue till MUx/Px becomes equal to MUy/Py. |
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