Explain determination of consumer equilibrium in case of two commodities using utility approach
Answers
In case of two commodities, the Consumer's Equilibrium is given in accordance with the Law of Equi-Marginal Utility.
Principle of equi-minimal utility possesses a vital place in the negligible utility investigation. It is through this rule purchaser's harmony is clarified. A buyer has a given pay which he needs to spend on different products he needs.
Presently, the inquiry is the means by which he would assign his cash pay among different merchandise that is to state, what might be his harmony position in regard of the buys of the different products. It might be referenced here that customer is thought to be 'reasonable,' that is, he briskly and cautiously and substitutes merchandise for each other in order to amplify his utility or fulfillment.
Assume there are just two merchandise X and Y on which a purchaser needs to spend a given salary. The purchaser's conduct will be represented by two variables: first, the negligible utilities of the products and also, the costs of two merchandise. Assume the costs of the products are given for the customer.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 spend on each good is equal. In other words, consumer is in equilibrium position when marginal utility of money expenditure on each goods is the same.
Now, the marginal utility of money expenditure on a good is equal to the marginal utility of goods divided by the price of the goods.