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Question

A consumer, Mr. Aman is in state of equilibrium consuming two goods X and Y, with given

prices Px and Py. Explain what will happen if:

a. MUx / Px is greater than MUy / Py.

b. Py falls

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Solution

(a) If MUx/Px > MUy/Py, then it means that satisfaction of Mr. Aman, derived from spending a rupee on Good X is greater than the satisfaction derived from spending a rupee on Good Y.

Mr. Aman, will reallocate his income by substituting Good X for Good Y.

As the consumption of Good X increases the marginal utility derived from it goes on diminishing and reverse proposition occurs for Good Y, this process will continue till MUx/Px becomes equal to MUy/Py.

(b) If Py falls, MUx/Px < MUy/Py, then it means that satisfaction derived from spending a rupee on Good X is lesser than the satisfaction derived from spending a rupee on Good Y.

Mr. Aman will reallocate his income by substituting Good Y for Good X.

As the consumption of Good Y increases the marginal utility derived from it goes on diminishing and reverse proposition occurs for Good X, this process will continue till MUx/Px becomes equal to MUy/Py.


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