Advertisements
Advertisements
Question
A consumer consumes only two goods X and Y and is in equilibrium. Price of X falls. Explain the reaction of the consumer through the Utility Analysis.
Solution
In case of two commodities, the consumer’s equilibrium is attained at that point, where; the utility derived from each additional unit of the rupee spent on each of the commodities is equal. That is, Marginal Utility of a Rupee spent on the commodity `x(i.e (MU_x)/(P_x))` is equal to the Marginal Utility of a Rupee spent on the commodity `Y(i.e (MU_y)/(P_y))`which in turn is equal to the Marginal Utility of Money (MUm). That is,
` (MU_x)/(P_x) (MU_y)/(P_y)=MU_m`
If price of the commodity X falls, then the value of the fraction `((MU_x)/(P_x))`increases. Mathematically, this implies:
`(MU_x)/(P_x)>(MU_y)/(P_y)=MU_m`
In such a situation, the consumer would increase his consumption of commodity X. He will continue to increase the consumption of commodity X until the equality between the marginal utilities of each of the commodities become equal to the marginal utility of money. At this situation, the equilibrium is restored. That is,
`(MU_x)/(P_x)=(MU_y)/(P_y)=MU_m`
APPEARS IN
RELATED QUESTIONS
A consumer consumes only two goods. Explain consumer's equilibrium with the help of utility analysis.
Explain the condition of consumer's equilibrium with the help of utility analysis.
A consumer consumes only two goods X and Y. Marginal utilities of X and Y is 3 and 4 respectively. Prices of X and Y are Rs 4 per unit each. Is consumer in equilibrium? What will be further reaction of the consumer? Give reasons.
A consumer consumes only two goods X and Y. Marginal utilities of X and Y are 4 and 3 respectively. Price of X and price of Y is Rs 3 per unit. Is consumer in equilibrium? What will be further reaction of the consumer? Give reasons.
A consumer consumes only two goods X and Y. The marginal utilities of X and of Y is 3. Prices of X and Y are Rs 2 and Rs 1 respectively. Is consumer in equilibrium? What will be further reaction of the consumer?
Give reasons.
A consumer consumes only two goods X and Y. If marginal utilities of X and Y are 4 and 5 respectively, and if price of X is Rs 5 per unit and that of Y is Rs 4 per unit is the consumer in equilibrium? What will be further reaction of the consumer? Explain.
A consumer consumes only two goods X and Y. Marginal utility of each is 2. The price per unit of X and Y is Re 1 and Rs 2 respectively. Is the consumer in equilibrium? What will be the further reaction of the consumer? Explain.
Should the following be treated as final expenditure or intermediate expenditure? Give reasons for your answer.
(i) Purchase of furniture by a firm.
(ii) Expenditure on maintenance by a firm.
What is meant by producer’s equilibrium? Explain the conditions of producer’s equilibrium through the ‘total revenue and total cost’ approach. Use diagram.
Answer the following question.
Explain with the help of a diagram the consumer’s equilibrium through utility approach.
"For a consumer to be in the equilibrium position, a marginal rate of substitution between the two goods must be equal to the ratio of prices of the two goods." Do you agree with the given statement? Justify your answer.
