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| 1. |
State condition of consumer equilibrium in case of a single commodity . |
| Answer» <html><body><p></p>Solution :(i) When purchasing a unit of a commodity a consumer compares its price with the expanted utility from the utility obtained is the benefit, and the pricepayable is the cost , the consumer compares benefit and the cost. He will by the unit of commodity only if the benefit is is greater than or at latest equal to the cost. <br/> (ii) Equilibrium conditions for single commodity consumer Equilibrium .<br/> (a) Necessary Condition<br/> Marginal utility of <a href="https://interviewquestions.tuteehub.com/tag/money-25502" style="font-weight:bold;" target="_blank" title="Click to know more about MONEY">MONEY</a> = price `""...(1)` <br/> Or `(" Marginal Utility of a Product in Util " [MU_x])/("Marginal Utility of One Rupe "[MU_R]) " = Price of X"....(<a href="https://interviewquestions.tuteehub.com/tag/2-283658" style="font-weight:bold;" target="_blank" title="Click to know more about 2">2</a>)`<br/> In particular, the condition (1) saya that themarginal utility of a product in terms of Money should be equal to its price.<br/>Sometimes this is loosely stated as Marginal Utility is equal to price, i.e. ., MU = price .<br/> `"*"`If MU `gt`price<br/>`<a href="https://interviewquestions.tuteehub.com/tag/implies-1037962" style="font-weight:bold;" target="_blank" title="Click to know more about IMPLIES">IMPLIES</a>` As a rational consumer he willContinue to purchase an additional unit on a commodity as long as MU = price .<br/> `implies` MU `gt`Price impulse benefit is greater than cost and when ever benefit is greater than cost the consumer keeps on consuming additional unit of a commodity till MU = price .<br/>`implies` It is so because according to the law of <a href="https://interviewquestions.tuteehub.com/tag/diminishing-2044202" style="font-weight:bold;" target="_blank" title="Click to know more about DIMINISHING">DIMINISHING</a> marginal utility MU falls moreis purchased . As MU falls it is bound to become equal to the price at some point of purchase.<br/> `"*"` If MU `lt`Price <br/>`implies` As a rational consumer he will have to reduce the consumption of a commodity as long as MU = price .<br/>`implies MU lt`price implies when benefit is less than cost , never benefit is less than cost the dressing the additional unit of a commodity till MU = price.<br/>`implies` It is so because according to the law of diminishing marginal utility, MU rises as less units are consumed. As MU rises , it is bound to become equal to the price at some point of purchase .<br/> (b) Sufficient condition: Total gain falls as more is purchased after equilibrium . it means that consumer continues to purchase so long as total gain is increasing or at least constant. <br/> (iii) It can be explained with the help of the following <a href="https://interviewquestions.tuteehub.com/tag/schedule-637564" style="font-weight:bold;" target="_blank" title="Click to know more about SCHEDULE">SCHEDULE</a> : <br/><img src="https://d10lpgp6xz60nq.cloudfront.net/physics_images/FM_M_ECO_XII_P1_C02_E02_070_S01.png" width="80%"/><br/>(a) Suppose , the price of commodity X in the market is Rs3 per unit .It means he has to pay Rs3 per unit for all the units he buys.Suppose, the unility obtained from the first unit is 5 utils(=Rs 5)The consumer will buy this unit because the utility of this unit is greater than the price and this process continues till Marginal utility = price as shown in the above schedule at quantity 3 .<br/> (b) Consumer will not buy the fourth unit utility of this unit is 2 unit because utility of this unit is 2 utils (= Rs 2)which is less than the price . It is not worth buying the fourth unit. The consumer will restrict his purchase to only 3 units.</body></html> | |