Question

 A consumer is consuming two goods x and y and is in equilibrium. The prices of x and y are Rs. 10 and Rs. 20 respectively and the marginal utility of good y is 50 utils. What will be marginal utility of good x ? *​

Answer 1

According to the utility approach, a consumer reaches equilibrium where the following equality is met.

P

x

MU

x

=

P

y

MU

y

According to the given question:

P

x

MU

x

=

4

5

=1.25

P

y

MU

y

=

5

4

=0.8

Since,

P

x

MU

x

is greater that

P

y

MU

y

.

Thus, the consumer is not in equilibrium. In order to reach the equilibrium, a rational consumer would increase the consumption of good X and decrease that of good Y.