a consumer consumes two goods. explain consumer equilibrium with the help of marginal utility approach
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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....
Assuming that only two goods the consumer consumes are X and Y, the conditions of equilibrium are: (i) MUx/Px= MUy/Py =MUm (ii) MU falls as more is consumed. (a) Suppose MUx/Px> MUy/Py. The consumer will not be in equilibrium because per rupee MU of X is greater than per rupee MU of Y. This will include the consumer to buy more of X by reducing expenditure on Y. It will lead to fall in MUx and rise in MUy. This will continue till MUx/Px=MUy/Py. (b) Unless MU falls as more of a good is consumed the consumer will not reach equilibrium.