Question

Which of the following condition needs to be satisfied for the consumer to achieve equilibrium?

• A. $\frac{M{U}_x}{M{U}_y}>\frac{P_x}{P_y}$
• B. $\frac{M{U}_x}{M{U}_y}<\frac{P_x}{P_y}$
• C. $\frac{M{U}_x}{M{U}_y}=\frac{P_x}{P_y}$
• D. None of the above

Answer 1

Answer: (C)

$\frac{M{U}_x}{M{U}_y}=\frac{P_x}{P_y}$

In order to reach consumer's equilibrium point, ratio of the marginal utility derived from the consumption of good X divided by marginal utility of good Y should be equal to the ratio of the price of good X and price of good Y.