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How is law of demand derived from utility analysis?

Answer» <html><body><p></p>Solution :The inverse relation between price and demand of a commodity can be explained with the help of two priciples used in utility <a href="https://interviewquestions.tuteehub.com/tag/analysis-25709" style="font-weight:bold;" target="_blank" title="Click to know more about ANALYSIS">ANALYSIS</a>. <br/> (i) On the basis of principle `MU_(X) = "Price"_(X)` <br/> We know that a consumer is at equilibrium when `MU_(X)=P_(X)`. <br/> Assuming that the price of commodity X <a href="https://interviewquestions.tuteehub.com/tag/falls-983294" style="font-weight:bold;" target="_blank" title="Click to know more about FALLS">FALLS</a> implying that now `MU_(X) gt P_(X)`, it will <a href="https://interviewquestions.tuteehub.com/tag/induce-499186" style="font-weight:bold;" target="_blank" title="Click to know more about INDUCE">INDUCE</a> him to buy more of X. He will continue to buy more until `MU_(X)` falls and reaches at equilibrium again. <br/> It shows that when price of commodity falls, its demand rises (inverse relation between price and demand). <br/> (ii) On the basis of principle `(MU_(X))/(P_(X))=(MU_(Y))/(P_(Y))` <br/> The <a href="https://interviewquestions.tuteehub.com/tag/equality-974006" style="font-weight:bold;" target="_blank" title="Click to know more about EQUALITY">EQUALITY</a> between two determines condumer equilibrium. Assuming that the price of <a href="https://interviewquestions.tuteehub.com/tag/good-1009017" style="font-weight:bold;" target="_blank" title="Click to know more about GOOD">GOOD</a> X falls implying that now `(MU_(X))/(P_(X)) gt (MU_(Y))/(P_(Y))`, it will induce the consumer to buy more of X as it given him more utility than Y. He will continue to buy more of X till he reaches equilibrium again. <br/> The above discussion shows that when price of a good falls its demand rises (inverse relation between price and demand).</body></html>


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