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Derive the inverse relation between price of the good and its demand from single commodity equilibrium condition " marginal utility = price". |
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Answer» Solution :As we know a CONSUMER purchases a good up to the point where marginal utility of the good becomes equal to the price of that good. MU=Price (i) It can be explained with the HELP of the following figures . It can be seen from the given figure that Figure B is derived from Figure A. (ii) In figure A, initially , Consumer equilibrium is attained at point E, where let MU ( 10 ) = Price ( 10 ) . Corresponding to point E, we derive point `E_1` , in figure B .  (iii) Due to fall in price (suppose from 10 to 8 ) , MU ` gt`Price at the given QUANTITY . So we can say that BENEFIT is greater than cost and the consumer increases the quantity TILL MU = Price condition is attained at F . Corresponding to point F , we derive the point `F_1`in figure B. So, by joining point `E_1 and F_1`together , we derive the demand curve . |
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