A consumer consumes only two goods X and Y and is in equilibrium.,price of X falls..Explain the reaction of the consumer through utility analysis.??
Good attempt by all the students but slightly missed the target. Although the answer provided by Kriti Arora is correct. However, the portion wherein she has stated about the change in consumption of good Y is not required as the question is only concerned about the change in consumption of good X.
The below is the correct answer as per the question and in adherence to the stipulated word limit.
A consumer consuming only two commodities X and Y attains equilibrium at that 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,
However, when the price of commodity x falls, the ratio of marginal utility to price of X becomes higher than that of Y, that is
In such a case, 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 of X falls. 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.