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 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. 

  • 141

as mux/px=muy/py

if px falls mux/px will inc so to get in equilibrium he will dec consumption of x and inc cons of y

  • 9

 when the price of good x falls he will consume more of good x and thus less unit of good y because his level of income remains constant 

according to utility approach of two commodity model 

mux/px = muy/py--(1)

let 

mux = 12

px = 2

muy= 24

py = 4

substituting in (1)

=> 12/2 = 24/4

=> 6 = 6

now as mentioned earlier the px falls (let px = 1)

thefore the mux rises (let mux = 14)

substituting in (1)

14/1 = 24/4

14 = 6

14>6

ie mux/px > muy/py

hence proved

  • -13

?????

  • -28

according to the utility approach 2 commodity approach:

MUx/ Px = MUy/Py if the price of x falls then MUx/Px>MUy/Py. thus to reach to the equilibrium level the consumer will decrease the consumption of good-x and increase the consumption of good-y. the consumer will thus move leftwards on the curve to gain equilibrium.

  • 7

According to the utility approach a consumer attains equilibrium when MUx/Px = MUy/Py. so if the price of good X falls then MUx/Px > MUy/Py. in that case consumer will start consuming more of good X and consequently consmption of  good Y will decrease. increase in consumption of good X will lead to decrease in its marginal utility owing to the law of diminishing marginal utility. same will happen to good Y, its marginal utility will increase due to decrease in its consumption.  this will happen untill  MUx/Px = MUy/Py and equilibrium is restored again.

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