A consumer consumes only two goods X and Y. Explain the conditions of consumer's equilibrium using Utility Analysis.

A consumer consumes only two goods X and Y. Explain the conditions of

1.	A consumer consumes only two goods X and Y. Explain the conditions of consumer's equilibrium using Utility Analysis.
Answer» Solution :Assuming that a consumer is CONSUMING only two goods X and Y, the CONDITIONS of consumer's equilibrium (Utility Analysis) are: (a) `(MU_(X))/(P_(X)) = (MU_(Y))/(P_(Y))` (b) `MU` of a GOOD falls as more units of the goods are consumed. Explanation: (a) Suppose `(MU_(x))/(P_(x)) gt (MU_(Y))/(P_(Y))` The consumer will not be in equilibrium because per rupee MU of X is greater than per rupee MU of Y. This will induce the consumer to buy more of X by reducing expenditure on Y, leading to fall in `MU_(X) " and rise in " MU_(Y)`. This will continue till the consumer ATTAINS the condition of `(MU_(X))/(P_(X)) = (MU_(Y))/(P_(Y))` (b) Unless MU of a good falls, as more units are consumed the consumer will not REACH the equilibrium.