Question

A consumer consumes a commodity x at certain point of consumption the MU derived from x is 24 and the price of good x is rs 10 per unit. If the MU of money assumed to be 2will the consumer be in equlibrium?why?what will a rational consumer do in this sitution

Answer 1

We know that a consumer is in equilibrium when rupee worth of satisfaction is equal to the price of the commodity.

Hence,

P(x) = MU-x(In rupees)

MUx (rupees) = MUx/MU of money

Therefore,

MUx (rupees) = 24/2 = 12

Now the condition for equilibrium is Px = MUx(rupees)

However, in the above case, this is not satisfied, as

MUx(rupees) = 12  and Px = 10

Therefore, MUx(rupees) > Px

Hence, the consumer derives more satisfaction in terms of rupees than the price of the commodity.

Hence,  a rational consumer will buy more of the commodity, as according to Law of Diminishing Marginal Utility, as he buys more and more of the good, his marginal utility diminishes.

Hence he should consume the good up to a point where his

P(x) = MU-x(In rupees)