question_answer

A consumer consumes only two goods X and Y. Marginal utilities of X and Y are 5 and 4 respectively. The prices of X and Y are Rs. 4 per unit and Rs. 5 per unit respectively. Is the consumer in equilibrium? What will be the further reaction of the consumer? Explain.

Answer:

Marginal utility of X = 5

Price of X = Rs. 4

Marginal utility of Y = 4

Price of Y = Rs. 5

\[M{{U}_{x}}\div {{P}_{x}}=5\div 4=1.25\]

\[M{{U}_{y}}\div {{P}_{y}}=4\div 5=0.8\]

No, the consumer is not in an equilibrium because the marginal utility of X is more than the marginal utility of Y and to reach the equilibrium level, the consumer should increase the consumption of good X and decrease the consumption of good Y.