A consumer consumes only two goods
and X and Y Elucidate the condition's
necessary to reach equilibrium
using
ordinal analysis
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There are two necessary conditions to attain Consumer’s Equilibrium in case of 2 commodities-
1. The ration of Marginal Utility to Price is same in case of the goods.
- We know that a consumer in consumption of single commodity (say, x) is at equilibrium when-
MUx/Px=MUm ,MUx is marginal utility of x, Px price of x and MUm is the marginal utility of one rupee (1)
-Similarly, consumer consuming another commodity (say, y) will be at equilibrium when-
MUy/Py=MUm. ,MUy is the marginal utility of y, Py price of y and MUm is the marginal utility of one rupee (2)
Equating (1) and (2), we get: MUx/Px=MUy/Py=MUm
As marginal utility of money (MUm) is assumed to be constant, the above equilibrium condition can be restated as:
MUx/Px=MUy/Py or MUx/MUy=Px/Py
2. MU falls as consumption increases: The second condition needed to attain consumer’s equilibrium is that MU of a commodity must fall as more of it is consumed. If MU does not fall as consumption increases, the consumer will end up buying only one good which is unrealistic and consumer will never reach the equilibrium position.
Finally, it can be concluded that a consumer in consumption of two commodities will be at equilibrium when he spends his limited income in such a way that the ratios of marginal utilities of two commodities and their respective prices are equal and MU falls as consumption increases.
1. The ration of Marginal Utility to Price is same in case of the goods.
- We know that a consumer in consumption of single commodity (say, x) is at equilibrium when-
MUx/Px=MUm ,MUx is marginal utility of x, Px price of x and MUm is the marginal utility of one rupee (1)
-Similarly, consumer consuming another commodity (say, y) will be at equilibrium when-
MUy/Py=MUm. ,MUy is the marginal utility of y, Py price of y and MUm is the marginal utility of one rupee (2)
Equating (1) and (2), we get: MUx/Px=MUy/Py=MUm
As marginal utility of money (MUm) is assumed to be constant, the above equilibrium condition can be restated as:
MUx/Px=MUy/Py or MUx/MUy=Px/Py
2. MU falls as consumption increases: The second condition needed to attain consumer’s equilibrium is that MU of a commodity must fall as more of it is consumed. If MU does not fall as consumption increases, the consumer will end up buying only one good which is unrealistic and consumer will never reach the equilibrium position.
Finally, it can be concluded that a consumer in consumption of two commodities will be at equilibrium when he spends his limited income in such a way that the ratios of marginal utilities of two commodities and their respective prices are equal and MU falls as consumption increases.
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