question_answer

A consumer consumes only two goods X and Y. If marginal utilities of X and Y are 4 and 5 respectively, and if price of X is Rs. 5 per unit and that of Y is Rs. 4 per unit, is the consumer in equilibrium ? What will be further reaction of the consumer? Explain.

Answer:

Marginal utility of X = 4

Price of X = Rs. 5

Marginal utility of Y= 5

Price of Y = 4

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

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

The ratio of \[M{{U}_{y}}\] to the price of Y is greater than the ratio of \[M{{U}_{x}}\] to the price of X, so the consumer is not at equilibrium and to reach equilibrium level, consumer should increase the consumption of good Y and decrease the consumption of good X.