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CONSUMER EQUILIBRIUM, IN CASE OF A TWO COMMODITY

Consumer Equilibrium, In Case Of A Two Commodity

Q.2 EXPLAIN CONSUMER EQUILIBRIUM, IN CASE OF A TWO COMMODITY, WITH THE HELP OF UTILITY ANALYSIS. CBSE, DELHI 2008 (MODIFIED)
ANSWER:
(a) STATEMENT Suppose, a consumer consumes only two goods X and Y.

  • He will attain equilibrium only if he allocates his given income on purchase of good X and Y in such a way that per rupee MU of both the products is equal and he gets maximum TU.
  • Any change in this combination will reduce his total satisfaction.
(b) CONDITIONS OF CONSUMER EQUILIBRIUM IN CASE OF TWO COMMODITY MODEL For a consumer to be in the state of equilibrium, following conditions must be fulfilled:

First Condition: \(MU_{x}= MU_{y}\)                                                                                         Px               Py

Where, \(MU_{x}\) = Marginal Utility of commodity X; \(P_{x}\) = Price of commodity X

\(MU_{y}\)= Marginal Utility of commodity Y; \(P_{y}\)  = Price of commodity Y

Second Condition: MU declines with increase in consumption i.e. Law of Diminishing Marginal Utility operates.

(c) EXPLANATION Condition no. 1.

If \(MU_{x}\) is not equal to \(MU_{y}\) then the consumer is not in the state of equilibrium.

\(P_{x}\) \(P_{y}\)

If \(MU_{x} > MU_{y}\)

Px Py

then per rupee \(MU_{x}\) > per rupee \(MU_{y}\) . So, consumer will buy more of X and less of Y.

This will reduce \(MU_{x}\) and increase \(MU_{y}\) . These changes will continue until

\(MU_{x} = MU_{y}\)

\(P_{x}\)    \(P_{y}\)

———————————————————————————————-

If \(MU_{x}< MU_{y}\)

Px Py

then per rupee \(MU_{x}\) < per rupee \(MU_{y}\). So, consumer will buy more of Y and less of X.

This will reduce \(MU_{y}\) and increase \(MU_{x}\). These changes will continue until

\(MU_{x}/P_{x}= MU_{y}\)

\(P_{x}\)   \(P_{y}\)

Condition no. 2. Unless MU falls as more of a good is consumed the consumer will not reach at equilibrium level.

Lets Practice

1. Consumer will be in the state of equilibrium when Marginal utility of commodity ‘X’ in terms of rupees is equal to the price of commodity ‘X’ in rupees.
  1. True
  2. False

View answer

Answer: True

2. Marginal utility can never be negative.
  1. True
  2. False

View answer

Answer: False

3.If MUx>MUy ,Px Py then consumer must buy more of commodity Y and less of commodity X to reach equilibrium.
  1. True
  2. False

View answer

Answer: False

4. MUx/Px> Muy/Py, the consumer must
  1. Consume more of X and Y
  2. Consume more of Y
  3. Consume less of X
  4. Consume more of X

View answer

Answer: Consume more of X