Question

A consumer consumes only two goods. Explain his equilibrium with the help of utility approach,

with tabular and diagrammatic illustration.​

Answer 1

ANSWER

A consumer is in a state of equilibrium when he maximizes his satisfaction income on different goods and services. Any deviation or change in the allocation of income under the given circumstance will lead to a fall in total satisfaction.

For two-commodity case: Rupee worth of marginal utility of money should be same across good X and good Y, and equal to marginal utility of money.

Condition 1 : MU(of good X)/ Price of good X = MU(OF GOOD Y)/ Price of good Y = MU(of money)

Reason: In case rupee worth of satisfaction (MU of good X/ price of good X) is greater for good X than good Y, the consumer will be prompted to buy more of good X and less of good Y. This would lead to a fall in marginal utility of good X and a rise in marginal utility of good Y. This process would continue till MU(of good X)/ Price of good X = MU(OF GOOD Y)/ Price of good Y = MU(of money) . In case rupee worth of satisfaction (MU of good y/ price of good Y) is greater for good Y than good X, the consumer will be prompted to buy more of good Y and less of good X. This would lead to a fall in marginal utility of good Y and a rise in marginal utility of good X.

Condition 2: Marginal utility of money remains constant.

Condition 3: Law of marginal utility holds good.

Answer 2

Answer:

A consumer is in a state of equilibrium when he maximizes his satisfaction by spending his given income on different goods and services. Any deviation or change in the allocation of income under the given circumstance will lead to a fall in total satisfaction.

For two-commodity case: Rupee worth of marginal utility of money should be same across good X and good Y, and equal to marginal utility of money.

Condition 1 : MU(of good X)/ Price of good X = MU(OF GOOD Y)/ Price of good Y = MU(of money)

Reason: In case rupee worth of satisfaction (MU of good X/ price of good X) is greater for good X than good Y, the consumer will be prompted to buy more of good X and less of good Y. This would lead to a fall in marginal utility of good X and a rise in marginal utility of good Y. This process would continue till MU(of good X)/ Price of good X = MU(OF GOOD Y)/ Price of good Y = MU(of money) . In case rupee worth of satisfaction (MU of good y/ price of good Y) is greater for good Y than good X, the consumer will be prompted to buy more of good Y and less of good X. This would lead to a fall in marginal utility of good Y and a rise in marginal utility of good X.

Condition 2: Marginal utility of money remains constant.

Condition 3: Law of marginal utility holds good.

Explanation:

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