A consumer consumes two goods X and Y, whose prices are Rs.3 and
Rs.5. The consumer is at equilibrium. What should a rational consumer
do if price of good Y decreases? Use indifference curve analysis
method.
Dear Student,
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 X 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.
So in the above case when price of Good Y decreases then consumer increases the consumption of Good Y till equality is again restored.
Regards
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 X 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.
So in the above case when price of Good Y decreases then consumer increases the consumption of Good Y till equality is again restored.
Regards