OR
Explain the conditions of consumer's equilibrium using marginal utility analysis.OR
A consumer consumes only two goods X and Y. Explain the conditions of consumer's equilibrium using utility analysis.Let the two goods be X and Y, their prices be PX and PY and their MU's as MUX and MUY. The a day : equilibrium condition is:
$\frac{\text{MU}_\text{X}}{\text{P}_\text{X}}=\frac{\text{MU}_\text{Y}}{\text{P}_\text{Y}}=\text{MU}$ of the last unit of money (rupee) spent on each good.
In case $\frac{\text{MU}_\text{X}}{\text{P}_\text{X}}>\frac{\text{MU}_\text{Y}}{\text{P}_\text{Y}},$ thus implies that MU from the last rupee spent on X is greater than MU of the last rupee spent on Y. This will induce the given consumer to transfer expenditure from Y to X, i.e., consumption of X rises and Y's falls. As a result, MUX falls and MUY rises. This transfer of expenditure continues till $\frac{\text{MU}_\text{X}}{\text{P}_\text{X}}=\frac{\text{MU}_\text{Y}}{\text{P}_\text{Y}}$ and the given consumer gets the same MU per rupee.
MU of a good falls as more of it is consumed. This condition is nothing but the assumption that the Law of Diminishing Marginal Utility is in operation. Suppose $\frac{\text{MU}_\text{X}}{\text{P}_\text{X}}>\frac{\text{MU}_\text{Y}}{\text{P}_\text{Y}},$ the given consumer will continue to transfer expenditure from Y to X till expenditure on Y is reduced to zero, and the entire income of the given consumer is spent on X. This implies that the given consumer consumes only one good, which is highly unrealistic. As a matter of fact, he spends his income on many goods. Thus, for the fulfillment of the first condition, it is also necessary to that the law of Diminishing MU is in operation.
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| Rs. in crores | ||
| (i) | Private final consumption expenditure | 8000 |
| (ii) | Government final consumption expenditure | 1000 |
| (iii) | Exports | 70 |
| (iv) | Imports | 120 |
| (v) | Consumption of fixed capital | 60 |
| (vi) | Gross domestic fixed capital formation | 500 |
| (vii) | Change in stock | 100 |
| (viii) | Factor income to abroad | 40 |
| (ix) | Factor income from abroad | 90 |
| (x) | Indirect taxes | 700 |
| (xii) | Net current transfers to abroad | (–) 30 |
OR
Explain the meaning of underemployment equilibrium. Explain two measures by which full employment equilibrium can be reached.| ₹ (in crores) | ||
| (i) | Compensation of employees | 2,500 |
| (ii) | Profit | 700 |
| (iii) | Mixed income of self-employed | 7,500 |
| (iv) | Government final consumption expenditure | 3,000 |
| (v) | Rent | 400 |
| (vi) | Interest | 350 |
| (vii) | Net factor income from abroad | 50 |
| (viii) | Net current transfers to abroad | 100 |
| (ix) | Net indirect taxes | 150 |
| (x) | Depreciation | 70 |
| (xi) | Net exports | 40 |
Calculate: