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InterviewSolution
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A consumer consumes only two goods. Explain the Conditions of the consumer's equilibrium with the help of Utility Analysis. |
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Answer» Solution :According to the two commodity consumer EQUILIBRIUM or law of Equimarginal utility , a consumer gets maximum satisfaction , when RATIOS of MU of two commodities and their respective prices are EQUAL. Conditions of Consumer.s Equilibrium in case of two commodities (i) Necessary Condition Necessary Condition Marginal utility of last RUPEE spend on each commodity is same. Suppose there are two commodities, X and Y respectively . So , for commodity X, the condition is Marginal Utility of Money = price of X Or `{:("Marginal Utility of a Product in Utile " [MU_x])/("Marginal Utility of One Rupee "[MU_R])` = Price of X Or `(MU_x)/P_x=MU_R""....(1)` Similarly , for commodityY , the condition is , `(MU_x)/(P_y)=MU_R""....(2)` Putting equation (2) in (1) , we get `(MU_x)/(P_x) = (MU_y)/(P_y)` (a) If, `(MU_x)/(P_x) gt (MU_y)/(P_y)` : It means, marginal utility from last rupee spent on commodity X is more than marginal utility from the last rupee spent on commodity Y. So, to attain the equilibrium consumer must increase the QUANTITY of X, which decrease the `MU_x` and decrease the quantity of Y which will increase the `MU_y` . Increase in quantity of X and decrease in quantity of X and decrease in quantity of Y continue till `(MU_x)/P_x = (MU_y)/(P_y)` . (b) If, `(MU_x)/P_x lt (MU_x)/P_y` :It means , marginal utility from the last rupee spent on commodity X is less than marginal utility from the last rupee spent on commodity Y. So , to attain the equilibrium the consumer must decrease the quantity of X which will increase the `MU_x`and increase the quantity of Y , which will decrease the `MU_y`Decrease in quantity of X and increase in quantity of Y continues till`(MU_x)/(P_x) = (MU_y)/P_y` (ii) Sufficient Condition Expenditure on commodity X+ Expenditure on commodity Y = Money Income . In other words Marginal Utility falls as more units of a commodity are consumed. This condition must be satisfied to attain the necessary condition , i.e., `(MU_x)/(P_x)=(MU_y)/(P_y) `. If. MU does not falls as Consumption of a commodity increases, the consumer will spend all his income on one commodity, which is highly unrealistic. |
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