Explain consumer's equilibrium in case of a two commodity with the help of a mrs schedule
Answers
In Case of Two Commodities
In case of two commodities, the Consumer's Equilibrium is given in accordance with the Law of Equi-Marginal Utility.
Law of Equi-Marginal Utility states that a consumer allocates his expenditure on the two commodities in such a manner that the utility derived from each additional unit of the rupee spent on each of the commodities is equal. That is,
In the diagram, OO1 represents the total income of a consumer. MUx and MUy represent the Marginal Utility curves of commodity X and commodity Y, respectively. Equilibrium is established at point E. At this point, OM amount of income is spent on commodity X and the remaining amount of income MO1 is spent on commodity Y. Suppose instead of point M, the consumer is at point S, where he spends OS amount of income on commodity X and SO1 amount of income on commodity Y. At point S, however;
Thus, the consumer would increase his consumption of commodity X till the equality is achieved. That is, in other words, when he reaches point E, where the equilibrium is restored by the equality between the marginal Utilities of each commodities
Consumer Equilibrium refers to a situation where a consumer gets maximum satisfaction out of his given money income and given market price.
Explanation:
Consumer Equilibrium in the Case of a Two-Commodity Model:
Suppose a consumer consumes only two goods, X and Y. They will attain equilibrium only if they allocate their given income on the purchase of X and Y in such a way that per rupee, the MU of both the products are equal and the consumer gets the maximum TU.
Consumer's Equilibrium means a state of maximum satisfaction. A situation where a consumer spends his given income purchasing one or more commodities so that he gets maximum satisfaction and has no urge to change this level of consumption, given the prices of commodities, is known as the consumer's equilibrium.
The law of equi-marginal utility states that the consumer will distribute his money income between the goods in such a way that the utility derived from the last rupee spent on each good is equal. In other words, the consumer is in an equilibrium position when the marginal utility of money expenditure on each good is the same.
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