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8. The economic value of the given equation, MUx/Px=MUm when x happens tobe a domestic fuel(LPG) and Px is lowerdby way of subsidy by the government.(Evaluation based) *(1 PointMUX/Px < MUmMUX/Px > MUMMUy/Py < MUYMUy/Py > MUY |
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Answer» tion:Taking MUM as constant, a fall in PX (by way of subsidy) would mean that MUXPX>MUM. The consumer's equilibrium is disturbed. But the change is good for the consumer. Induced by LOWER PX, the consumer INCREASE the consumption of LPG. A rise in the consumption of LPG leads to a fall in MUX. The equilibrium (MUXPX=MUM) is now ESTABLISHED at a HIGHER level of consumption of LPG.The subsidy plays its role by increasing the consumption of LPG, as desired by the government Consumer's equilibrium is shifted to a higher level of satisfaction, even when his INCOME remains constant. |
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