Question

Suppose a consumer is at present is in equilibrium. If he is consuming only 2 goods X and  Y Suppose if price of good X increases then what will he do if:-

        (i) Px increases

        (ii) Py decreases



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Answer 1

Answer:

ANSWER

In case of two commodities, the consumer's equilibrium is attained at the point where the utility derived from each additional unit rupee spent on each of the goods is equal. That is, Marginal Utility of a Rupee spent on the good x(i.e,

P

x

MU

x

) is equal to the Marginal Utility of a Rupee spent on good Y(i.e,

P

y

MU

y

), which, in turn, is equal to the Marginal Utility of Money(MUm).

That is,

P

x

MU

x

=MU

m

Howevwe, when the price of commodity x rises, the ratio of marginal utility to price of (

P

z

MU

z

) becomes lower than that of Y, that is

P

x

MU

x

<

P

y

MU

y

In such a case , the consumer rearranges his consumption combination such that the equality is again restored. He would decreases his consumption of commodity X. With this decreases, marginal utility of x rises, As a result the ratio of marginal utility to price of X rises. The consumer would continue decreasing the consumption of commodity X till the equality between the ratio of marginal utility to price in case of X and Y is again reached

Explanation:

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