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
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
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.
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.
