A consumer consumes only two goods. Explain the conditions of consumer's equilibrium with the help of the Utility Analysis.

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Solution

The consumer is in equilibrium when:

(1) Ratio of marginal utility to price in case of each good is the same. Let the two goods be X and Y, then _.

Suppose _ which means per rupee marginal utility by spending on X is greater than on Y. This induces the consumer to spend more on X by reducing spending on Y. This leads to fall in MUx and rise in MUy. The shift of spending from on Y on to X continues till ___.

(2) Marginal utility falls as more is consumed, i.e. the Law of diminishing marginal utility is operating. This ensures fulfillment of the first condition.

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