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InterviewSolution
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A consumer consumes only two goods X and Y and is in equilibrium .Price of falls . Explain the reaction of the consumer through the Utility Analysis |
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Answer» Solution :As, we know conditions for consumer equilibrium is , Necessary Condition Marginal UTILITY of LAST rupee spent 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 in Util Product in Util " [MU_x])/( "Marginal Utility of One Rupee " [MU_R])` = Price of X or `(MU_x)/(P_x) = MU_R "".....(1)` Similarly, for commodity Y , the condition is, `(MU_y)/P_y=MU_R ""....(2)` Putting EQUATION (2) in (1), we get `(MU_x)/(P_y)=(MU_y)/P_y` But as given in the question that the ratio of marginal utility to price in CASE of X is higher than that in case of Y, i.e., `(MU_x)/P_x gt (MU_y)/P_y` It means marginal utility from the 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 decreases the `MU_x` and decreases the quantity of Y, which will increase the `MU_y` Increase in quantity of X and decrease in quantity of Y continue till `(MU_x)/P_x = (MU_y)/P_y` . |
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