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.
They will attain equilibrium only if they allocate their given income on the purchase of X and Y in such a way that per rupee, the MU of both the products are equal and the consumer gets the maximum TU. Any change in this combination will reduce the total satisfaction of the consumer. |
| (b) Conditions of consumer equilibrium in the case of a 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, \(\begin{array}{l}MU_{x}\end{array} \) Â = Marginal Utility of commodity X; \(\begin{array}{l}P_{x}\end{array} \) = Price of commodity X
\(\begin{array}{l}MU_{y}\end{array} \) = Marginal Utility of commodity Y; \(\begin{array}{l}P_{y}\end{array} \) Â = Price of commodity Y
Second condition: MU declines with an increase in consumption, i.e., the law of diminishing marginal utility operates. |
| (c) Explanation | Condition- 1.
If \(\begin{array}{l}MU_{x}\end{array} \) is not equal to \(\begin{array}{l}MU_{y}\end{array} \) then the consumer is not in the state of equilibrium.
If MUx/Px > MUy/Py then per rupee \(\begin{array}{l}MU_{x}\end{array} \) > per rupee \(\begin{array}{l}MU_{y}\end{array} \) . So, consumer will buy more of X and less of Y.
This will reduce \(\begin{array}{l}MU_{x}\end{array} \) and increase \(\begin{array}{l}MU_{y}\end{array} \) . These changes will continue until
\(\begin{array}{l}MU_{x} = MU_{y}\end{array} \)
\(\begin{array}{l}P_{x}\end{array} \) Â Â \(\begin{array}{l}P_{y}\end{array} \)
———————————————————————————————- If MUx/Px < MUy/Py then per rupee \(\begin{array}{l}MU_{x}\end{array} \) < per rupee \(\begin{array}{l}MU_{y}\end{array} \) . So, consumer will buy more of Y and less of X.
This will reduce \(\begin{array}{l}MU_{y}\end{array} \) and increase \(\begin{array}{l}MU_{x}\end{array} \) . These changes will continue until
\(\begin{array}{l}MU_{x}/P_{x}= MU_{y}\end{array} \)
\(\begin{array}{l}P_{x}\end{array} \) Â Â \(\begin{array}{l}P_{y}\end{array} \)
Condition- 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 the marginal utility of commodity X (in terms of rupees) is equal to the price of commodity X. |
| 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. If MUx/Px> Muy/Py, the consumer must _______ . |
| a. Consume more of X and Y
b. Consume more of Y c. Consume less of X d. Consume more of X |
| Ans:Â d. Consume more of X |
Its great