Vishnu consumes two commodities X and Y, whose prices are ₹16 and ₹24 per unit
respectively. His MUx =6 and MU y =4, then according to utility approach, state whether
Vishnu is in equilibrium? If not, then tell what should he do to achieve equilibrium.
Answers
Answer:
This is an example of the Two Commodity Case.
In the 2 commodity case, equilibrium is struck when
MUx / Px = MUy / Py
i.e. the utility derived from consuming a unit of Good X is equal to the utility derived from consuming a unit of Good Y.
Hence, in the above question,
MUx = 12
MUy = 12
Px = 3
Py = 4
Hence, putting the variables in the above equation,
12/3 = 12/4
4 = 3
Which is NOT true.
Therefore, MUx / Px > MUy / Py
Hence, the utility derived from consumption of Good X is greater than utility derived from Good Y.
In this case, a rational consumer should consume more of Good X.
As per Law of Diminishing Marginal Utility, as the consumer consumes more units of Good X, his Marginal utility will decrease.
He should continue consuming until he reaches the equilibrium point where, MUx / Px = MUy / Py
Explanation: