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| 1. |
A consumer consumes only two goods. Explain the Conditions of the consumer's equilibrium with the help of Utility Analysis. |
| Answer» <html><body><p></p>Solution :According to the two commodity consumer <a href="https://interviewquestions.tuteehub.com/tag/equilibrium-974342" style="font-weight:bold;" target="_blank" title="Click to know more about EQUILIBRIUM">EQUILIBRIUM</a> or law of Equimarginal utility , a consumer gets maximum satisfaction , when <a href="https://interviewquestions.tuteehub.com/tag/ratios-1177874" style="font-weight:bold;" target="_blank" title="Click to know more about RATIOS">RATIOS</a> of MU of two commodities and their respective prices are <a href="https://interviewquestions.tuteehub.com/tag/equal-446400" style="font-weight:bold;" target="_blank" title="Click to know more about EQUAL">EQUAL</a>. Conditions of Consumer.s Equilibrium in case of two commodities<br/>(i) Necessary Condition <br/> Necessary Condition<br/> Marginal utility of last <a href="https://interviewquestions.tuteehub.com/tag/rupee-1192322" style="font-weight:bold;" target="_blank" title="Click to know more about RUPEE">RUPEE</a> spend on each commodity is same. <br/> Suppose there are two commodities, X and Y respectively . <br/> So , for commodity X, the condition is Marginal Utility of Money = price of X <br/> Or `{:("Marginal Utility of a Product in Utile " [MU_x])/("Marginal Utility of One Rupee "[MU_R])` = Price of X<br/> Or `(MU_x)/P_x=MU_R""....(1)`<br/> Similarly , for commodityY , the condition is , <br/> `(MU_x)/(P_y)=MU_R""....(2)` <br/> Putting equation (2) in (1) , we get <br/> `(MU_x)/(P_x) = (MU_y)/(P_y)` <br/> (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 <a href="https://interviewquestions.tuteehub.com/tag/quantity-1174212" style="font-weight:bold;" target="_blank" title="Click to know more about QUANTITY">QUANTITY</a> 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)` . <br/> (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` <br/> (ii) Sufficient Condition <br/> Expenditure on commodity X+ <br/> Expenditure on commodity Y = <br/> 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.,<br/>`(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.</body></html> | |