InterviewSolution
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InterviewSolution
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A consumer, Mr. Aman is in state of equilibrium consuming two goods X and Y, with given prices Px and Py. Explain what will happen if: (a) M Yx/Px > is greater than MUy/Py (b) Py falls. |
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Answer» (a) If MUx/Px > MUy/Py, then it means that satisfaction of Mr Aman, derived from spending a rupee on good X is greater than the satisfaction derived from spending a rupee on good Y. Mr. Aman, will reallocate his income by substituting good X for good Y. As the consumption of good X increases the marginal utility derived from it goes on diminishing and reverse proposition occurs for good Y, this process will continue till MUx/Px becomes equal to MUy/Py. (b) If Py falls. MUx/Px < MUy/py then it means that satisfaction derived from spendingh rupee on good X is lesser than the satisfaction derived from spending a rupee on good Y. Mr. Aman will reallocate his income by substituting good Y for good X. As the consumption of good 7 increases the marginal utility derived from it goes on diminishing and reverse proposition occurs for good X, this process will continue till MUx/Px becomes equal to MUy/Py. |
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