Question

A consumer consumes only two goods X and Y. Marginal utility of each is 2. show that The price per unit of X and Y is Rs. 1 and Rs. 2 respectively.

Answer 1

HEY!!!!!

you assume that the law of diminishing marginal utility operates and the Marginal utility at the last unit of consumption(i.e., 3rd unit) is 1, then for three units the total utility is 5(given)

Under the cardinal utility approach MU=P=1 ( assuming marginal utility of money is 1),then consumer surplus = TU - TC for the three units consumed.

Thus, CS=5–3=2.

However, if you assume constant marginal utility, then the TU function cannot be 5. Thus, there seems some issue with the way the question is framed. If we ignore the total utility function and stick to only the Marginal utility function then,

CS = total utility for three units - total cost=3–3=0