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Standard XI

Economics

Duopoly Games

A consumer co...

Question

A consumer consumes only two goods X and Y whose prices are Rs. 2 and Rs. 1 per unit respectively. If the consumer chooses a combination of the two goods with marginal utility of X being 4 and that of Y being 4, is the consumer in equilibrium? Give reasons. Explain what a rational consumer would do in this situation. Use marginal utility analysis.

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Solution

Given, $P_{X} = R s . 2$ $P_{Y} = R s . 1$ ; $M U_{X} = 4$ ; $M U_{Y} = 4$

The consumer attains equilibrium when

$\frac{M U_{X}}{P_{X}} = \frac{M U_{Y}}{P_{Y}}$

In the given question, the consumer is not in the equilibrium because here,

$\frac{M U_{X}}{P_{X}} < \frac{M U_{Y}}{P_{Y}}$

Using the given values, $\frac{4}{2} < \frac{4}{1}$

The consumer would react to this situation by increasing the consumption of good Y in place of good X. This will reduce marginal utility of Y and increase marginal utility of X.

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