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Show with the help of Cardinal utility analysis ,that consumer will like to buy more of the good on which government has imposed 'maximum price ceiling'. |
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Answer» Solution :(i)Due to maximum proce ceiling,the market price of the product is LESS than the equilibrium price. (II)Assuming initially consumer is in equilibrium when: Marginal Utility of money =price.........(A) OR `("Marginal Utility of a product in Utils" [MU_(x)])/("Marginal Utility of One Rupee" [MU_(R)])=price`........(B) In Particular ,the condition (A) says that the marginal utility of a product on terms of money should be equal to its price. Something,this is loosely stated as Marginal utility is equal to price ,i.e., MU=Price. (iii)(a)With fall in Price ,now MU will be greater than the price , (b)If MU `gt` Price implies When BENEFIT is greater than cost and whenever benefit is greater than cost the consumer KEEPS on consuming additional unit of a ommodity till MU =Price. (c)It is so because according to the law of DIMINISHING marginal utility ,MU falls as more is purchased.As MU falls mit is bound to become equal to the price at some point of purchase. |
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