A consumer consumes only two goods. Explain consumer's equilibriu… - Vidyadip

Question

A consumer consumes only two goods. Explain consumer's equilibrium with the help of utility analysis.

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Answer

Assuming that the only two goods the consumer consumes are X and Y, the conditions of equilibrium are:

$\frac{\text{MUx}}{\text{Px}}=\frac{\text{MUy}}{\text{Py}}$
MU falls as more is consumed.

Explanation:

Suppose $\frac{\text{MUx}}{\text{Px}}>\frac{\text{MUy}}{\text{Py}}.$ The consumer will not be in equilibrium because per rupee MU of X is greater than per rupee MU of Y. This will induce the consumer to buy more of X by reducing expenditure on Y. It will lead to fall in $MU_x$ and rise in $MU_y$. This will continue till $\frac{\text{MUx}}{\text{Px}}=\frac{\text{MUy}}{\text{Py}}.$
Unless MU falls as more of a good is consumed the consumer will not reach equilibrium.

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