Question

“A consumer consumes only two goods X and Y”. State and explain the conditions of consumer’s equilibrium with the help of utility analysis.

 

Answer 1

In case of two commodities, the consumer’s equilibrium is attained in accordance with the Law of Equi-Marginal Utility. It states that a consumer allocates his expenditure on two goods in such a manner that 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 commodity x = Marginal Utility of a Rupee spent on commodity y = Marginal Utility of Money 

Or `          (Mu_x)/P_x=(MU_y)/(P_y)=Mu_m`

In the diagram, OO₁ represents the total income of a consumer. MU_x and MU_y represent the Marginal Utility curves of commodity X and commodity Y, respectively. Equilibrium is established at point E, where, MU_x and MU_y intersect each other and with MU_y.

At this point, OM amount of income is spent on commodity X and the remaining amount of income MO₁ is spent on commodity Y.

Suppose, instead of point M, the consumer is at point S, where he spends OS amount of income on commodity X and SO₁ amount of income on commodity Y. At point S, however;

`(MU_x)/(P_x)>(MU_y)/(P_y)` 

Thus, the consumer would increase his consumption of commodity X till the equality is achieved. That is, in other words, the consumer increases his consumption of good X till he reaches point E where,  

`(MU_x)/(P_x)=(MU_y)/(P_y)`