Question

a consumer consumes only two goods X and Y. at a consumption level of two goods, he finds that the ratio of marginal utility to price in case of X is higher than in case of Y explain the reaction of consumer

Answer 1

Explanation:

. Consumers' equilibrium when two goods are involved

. In the case of two commodities, the following conditions must be met to achieve consumer equilibrium.

. 1) For both items, the marginal utility to price ratio is the same.

. Since it is assumed that the marginal utility of money is constant, the condition can be written as MUx/Px=MUy/Py or MUx/MUy=Px/Py. If Px=Py, the equilibrium condition can be written as MUx=MUy.

. 2) As consumption rises, MU decreases.

. In the example above, good X provides the buyer with greater marginal utility than good Y. He'll purchase more X and less Y. As a result, MUx will decrease and MUy will increase until an equilibrium is reached.

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