A consumer consumes only two goods X and Y. Marginal utilities of X and Y is 3 and 4 respectively. Prices of X and Y are Rs 4 per unit each. Is consumer in equilibrium? What will be further reaction of the consumer? Give reasons.

Solution

Consumer will attain its equilibrium (maximum satisfaction) at the point, where marginal utility of a product divided by the marginal utility of a rupee, is equal to the price.
Consumer’s equilibrium = $fraction numerator Mu space of space straight a space product over denominator Mu space of space straight a space Rupee end fraction$
In case of two goods, a consumer equilibrium attain where:
$MU subscript straight x over straight P subscript straight x equals MU subscript straight y over straight P subscript straight y$
For goods X,
$MU subscript straight x over straight P subscript straight x equals space 3 over 4 space equals space 0.75$
For goods Y,
$MU subscript straight y over straight P subscript straight y equals 4 over 4 equals 1$
Here, $MU subscript straight y over straight P subscript straight y greater than MU subscript straight x over straight P subscript straight x$
Hence consumer is not in equilibrium, Thus, in order to attain equilibrium consumer will increase the consumption of good Y and decrease the consumption of good X.