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Question
Answer the following question.
Explain with the help of a diagram the consumer’s equilibrium through utility approach.
Solution
In the case of the consumer consumes two or more than two commodities his equilibrium will be determined by the Law of Equi-marginal utility.
According to the Law of Equi-marginal utility, the consumer spends his limited income on different goods in such a way that marginal utility derived by all commodities are equal.
MUX = MY = MUZ ………
Explanation:
Let us now discuss the Law of Equi-marginal Utility with the help of a numerical example: Suppose, the total money income of the consumer = ₹ 5.
Price of good X and Y = ₹ 1 per unit.
So, the consumer can buy a maximum of 5 units of ‘X’ or 5 units of Y. The given table shows the marginal utility which the consumer derives from various units of ‘X’ and ‘Y’.
Table – Consumer’s Equilibrium – 2 Commodities
| Units | MUx 'X' ( in utils) | MUy 'Y' (in utils) | Money Spent | TU |
|
1 |
20 | 16 | Good X | 20 |
| 2 | 14 | 12 | Good X | 16 |
| 3 | 12 | 8 | Good X | 14 |
| 4 | 7 | 5 | Good X | 12 |
| 5 | 5 | 3 | Good Y | 12 |
| Total- 74 |
From the table, it is obvious that the consumer will spend the first rupee on commodity ‘X’, which will provide him utility of 20 utils. The second rupee will be spent on commodity ‘ Y’ to get a utility of 16 utils. To reach the equilibrium, a consumer should purchase that combination of both the goods, when
(i) MU of the last rupee spent on each commodity is the same; and
(ii) MU falls as consumption increases.
It happens when a consumer buys 3 units of ‘X’ and 2 units of ‘ Y’ because:
MU from last rupee (i.e5th rupee) spent on commodity Y gives the same satisfaction of 12 utils as given by last rupee {i.e., 4th rupee) spent on commodity X; and
MU of each commodity falls as consumption increases.
The total satisfaction of 74 utils will be obtained when a consumer buys 3 utils of ‘X’ and 2 units of ‘ Y’. It reflects the state of the consumer’s equilibrium. If the consumer spends his income in any other order, total satisfaction will be less than 74 utils.
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