A consumer consumes only two goods $A$ and $B$ and is in equilibrium. Show that when price of good $B$ falls, demand for $B$ rises. Answer this question with the help of utility analysis.
CBSE DELHI - SET 2 2014
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Given $\frac{\text{MU}_{A}}{\text{P}_{A}}=\frac{\text{MU}_{B}}{\text{P}_{B}}$ (Consumer is in equilibrium)
Given that $P_B$ falls, then
$\frac{\text{MU}_{A}}{\text{P}_{A}}<\frac{\text{MU}_{B}}{\text{P}_{B}}$
Since per rupee $MU$ of $B$ is higher than per rupee $MU$ of $A$, the consumer will reduce expenditure on $A$ and increase that on $B$.
So, when $P_B$ falls, demand for $B$ rises.
Given that $P_B$ falls, then
$\frac{\text{MU}_{A}}{\text{P}_{A}}<\frac{\text{MU}_{B}}{\text{P}_{B}}$
Since per rupee $MU$ of $B$ is higher than per rupee $MU$ of $A$, the consumer will reduce expenditure on $A$ and increase that on $B$.
So, when $P_B$ falls, demand for $B$ rises.
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