Consumer Equilibrium, In Case Of 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.

True or False :

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.
Ans: True
2. Marginal utility can never be negative.
Ans: False

3. If MUx>MUy ,Px Py then 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
  1. Consume more of X and Y
  2. Consume more of Y
  3. Consume less of X
  4. Consume more of X
Ans: 4. Consume more of X

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