Question

2. Explain the economic value of the following equation,MUx MUm when X happens to be Px
domestic fuel (LPG) and Px is lowered by way of subsidy by the government.​

Answer 1

Answer:

Taking MUm as constant, a fall in Px (by way of subsidy) would mean that MUx/Px > MUm . The

consumer's equilibrium is disturbed. But the change is good for the consumer. Induced by lower

Px, the consumer increases the consumption of LPG. A rise in the consumption of LPG leads to a

MUx. The equilibrium (MUx/Px=MUm) is now established at a higher level of consumption of

LPG. The subsidy plays its role by increasing the consumption of LPG, as desired by the government. Consumer's equilibrium is shifted to a higher level of satisfaction, even when his income remains constant.