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A consumer, Mr. Aman is in state of equilibrium consuming two goods X and Y, with given prices Px and Py. Explain what will happen if : (i) MUx/Px is greater than MUy / Py. (ii) Py falls. |
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Answer» (i) If MUx/Px > MUy/Py, then it means that satisfaction of Mr. Aman derived from spending a rupee on good X is greater than the satisfaction derived from spending a rupee on good Y. Mr. Aman 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 MUy/Py. (ii) If Py falls, MUx/Px< MUy/Py, then it means that satisfaction derived from spending a rupee on good X is lesser than the satisfaction derived from spending a rupee on good Y. Mr. Aman will reallocate his income by substituting good Y for good X. As the consumption od Good Y increase, the marginal utility derived from it goes on diminishing and reverse proposition occurs for good X, this process will continue till MUx/Px becomes equal to MUy/Py. |
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