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Theory of consumer behaviour — Economics STD 11 Commerce — Question

CBSE BoardEnglish MediumSTD 11 CommerceEconomicsTheory of consumer behaviour6 Marks
Question
Explain the conditions of consumer's equilibrium under utility analysis.
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.
✓

Answer

Assuming that the given consumer consumes only two goods $X$ and $Y$. Further the income of the consumer and the prices of the two goods, are also assumed to be given. Now for the given consumer to be in equilibrium under the utility analysis two conditions must be fulfilled:
  1. MU of last unit of money (rupee) spent on each good is the same:
Let the two goods be $X$ and $Y$, their prices be $P_X$ and $P_Y$ and their MU's as $MU_X$​​​​​​​ and $MU_Y​​​​​​​$​​​​​​​. 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, $MU_X$​​​​​​​ falls and $MU_Y$ 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.
  1. MU of a good falls as more of it is consumed:
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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