question_answer

A consumer consumes only two goods X and K At a consumption level of these two goods, he finds that the ratio of marginal utility to price in case of X is higher than in case of K Explain the reaction of the consumer.

Answer:

A consumer consuming only two commodities X and Y attains equilibrium at the level where,

Marginal Utility of a Rupee spent on commodity X = Marginal Utility of a Rupee spent on commodity Y = Marginal Utility of Money.

Or,        \[\frac{M{{U}_{x}}}{{{P}_{x}}}=\frac{M{{U}_{y}}}{{{P}_{y}}}=M{{U}_{m}}\]

However, when the ratio of marginal utility to price of X higher than that of Y, that is, if \[\left( \frac{M{{U}_{x}}}{{{P}_{x}}}>\frac{M{{U}_{y}}}{{{P}_{y}}} \right)\]then, the consumer rearranges his consumption combination such that the equality is again restored. He would increase his consumption of commodity X. With the increase in the consumption of commodity X, marginal utility or X fails. As a result, the ratio of marginal utility to price of X falls. The consumer would continue increasing the consumption of commodity X till the equality between  the ratio of marginal utility to price in case of X and Y is again reached. That is, in other words, when he reaches point E, where the equilibrium is restored by the equality between the marginal Utilities of each commodities.