Question

A consumer consumes two goods X and Y and is in equilibrium. Price of X rises. Explain the reaction of the consumer through utility analysis.

Answer 1

Explanation:

The consumer is in equilibrium when MUx / Px=MUy / Py. ... Accordingly, the consumer will start buying more of X commodity in place of Y commodity. When consumption of X increase, MUx must fall, while a cut in consumption of Y would mean a rise in MUy. Accordingly, MUx/Px will start falling while MUy/Py will start rising.