Consumer Equilibrium in Case of a Two Commodity, With the Help of Utility Analysis
| (a) Statement | Suppose, a consumer consumes only two goods X and Y.
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| (b) Conditions of Consumer Equilibrium in Case of Two Commodity Model | For a consumer to be in the state of equilibrium, the following conditions must be fulfilled:
First Condition: MUx/Px = MUy/Py Where, \(MU_{x}\)Â = Marginal Utility of commodity X; \(P_{x}\) = Price of commodity X \(MU_{y}\)= Marginal Utility of commodity Y; \(P_{y}\) Â = Price of commodity YSecond Condition: MU declines with an 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. If MUx/Px > MUy/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 \(MU_{x} = MU_{y}\) \(P_{x}\) Â Â \(P_{y}\)———————————————————————————————- If MUx/Px < MUy/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 \(MU_{x}/P_{x}= MU_{y}\) \(P_{x}\) Â Â \(P_{y}\)
Condition no. 2. Unless MU falls as more of a good is consumed the consumer will not reach at equilibrium level. |
True or False :
| 1. The 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. |
| Ans: True |
| 2. The marginal utility can never be negative. |
| Ans: False |
| 3. If MUx/Px > MUy/Py then the consumer must buy more of commodity Y and less of commodity X to reach equilibrium. |
| Ans: False |
Choose The Best Answer :
| 4. MUx/Px> Muy/Py, the consumer must |
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| Ans: 4. Consume more of X |
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