Question

If MU of X is 10

the consumer consumes
only two goods x and Y, MU y = 5
Price of goodX is RS2, Price of goodY
is Rs 2
consumer equilibrium
Explain?
​

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.