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Standard VII

Mathematics

Partnership

A consumer co...

Question

A consumer consumes only two goods $X$ and $Y$ . Marginal utilities of $X$ and $Y$ are $5$ and $4$ respectively. The prices of $X$ and $Y$ are $R s . 4$ per unit and $R s . 5$ per unit respectively. Is the consumer in equilibrium? What will be the further reaction of the consumer?

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Solution

According to the utility approach, a consumer reaches equilibrium where the following equality is met.
$\frac{M U_{x}}{P_{x}} = \frac{M U_{y}}{P_{y}}$
According to the given question:
$\frac{M U_{x}}{P_{x}} = \frac{5}{4} = 1.25$
$\frac{M U_{y}}{P_{y}} = \frac{4}{5} = 0.8$
Since, $\frac{M U_{x}}{P_{x}}$ is greater that $\frac{M U_{y}}{P_{y}}$ .
Thus, the consumer is not in equilibrium. In order to reach the equilibrium, a rational consumer would increase the consumption of good $X$ and decrease that of good $Y$ .

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A consumer consumes only two goods X and Y. Marginal utilities of X and Y are 5 and 4 respectively. The prices of X and Y are Rs.4 per unit and Rs.5 per unit respectively. Is the consumer in equilibrium? What will be the further reaction of the consumer?

A consumer consumes only two goods $X$ and $Y$ . Marginal utilities of $X$ and $Y$ are $5$ and $4$ respectively. The prices of $X$ and $Y$ are $R s . 4$ per unit and $R s . 5$ per unit respectively. Is the consumer in equilibrium? What will be the further reaction of the consumer?