Question

The marginal utility(MU) of the last unit of commodity X consumed is twice the MU of the last unit of commodity Y consumed, the consumer is in equilibrium only if:

• A. The income of the consumer is doubled
• B. The price of X is equal to the price of Y
• C. The expenditure of X is equal to twice on Y
• D. The price of Y is one half of the price of X

Answer 1

Answer: (D)

The price of Y is one half of the price of X

The Equi-Marginal Utility theory states that consumers will maximise total utility from their incomes by consuming that combination of goods where:

$\frac{M{U}_a}{M{U}_b}=$ $\frac{P_a}{P_b}$

For example, suppose bread = Re.1 and Rice = Rs.2.

• Rice is twice as expensive as bread. Therefore, it would make sense to choose a quantity of rice, where the marginal utility of rice was twice the MU of bread. Therefore, you would tend to buy such a quantity of rice so as to make sure the marginal utility of rice justifies its higher price.
• If rice was giving three times as much marginal utility but was only twice as expensive, it would make sense to buy more rice until the marginal utility fell to that ratio.