Question

‘State and explain the condition of consumer's equilibrium in case of two commodities through utility approach.

Solution

Condition of consumer's equilibrium (in case of two commodities)

Consumer's equilibrium in case of two commodities through utility approach is attained when ratio of MU of a commodity to its price becomes equal to the ratio of MU of the other commodity to its price. Symbolically it is expressed as

MU subscript straight x over straight P subscript straight x equals MU subscript straight y over straight P subscript straight y

i.e., ratio of MU of commodity x to its price

open parentheses MU subscript straight x over straight P subscript straight x close parentheses

s equal to ratio of MU of commodity y to its price

open parentheses MU subscript straight y over straight P subscript straight y close parentheses

The equation also implies if price of commodity x is equal to price of commodity y (if P_x = P_y), the consumer will attain equilibrium when MU_x = MU_y.

It also means that satisfaction is maximum when a rupee worth of MU is same in both the goods x and y. This is proved in the following utility schedule of a consumer who has र 20 with him to spend on two goods x and y. Further suppose price of each unit of x (say tea) is र 5 and that of y (say biscuits) is र 2. How will consumer attain his equilibrium?

UTILITY SCHEDULE IN CASE OF TWO GOODS
Units of goods	MU_x	MU_x/ P_x (A rupee worth of MU)	MU_y	MU_y / P_y (A rupee worth of MU)
1	50	50 ÷ 5 = 10	24	24 ÷ 2 = 12
2	40	40 ÷ 5 = 8	22	22 ÷ 2 = 11
3	30	30 ÷ 5 = 6	20	20 ÷ 2 = 10
4	20	20 ÷ 5 = 4	18	18 ÷ 2 = 9
5	10	10 ÷ 5 = 2	16	16 ÷ 2 = 8
6	0	—	14	14 ÷ 2 = 7

For obtaining maximum satisfaction from spending his given income of र 20 the consumer will buy 2 units of x (say, tea) by spending र 10(= 2 × 5) and 5 units of y (say, biscuits) by spending र 10(= 5 × 2). This combination of goods brings him maximum satisfaction (or state of equilibrium) because a rupee worth of MU in case of good x is $8 open parentheses MU over straight P subscript straight x equals 40 over 5 close parentheses$ and in case of good y is also $8 open parentheses MU over straight P subscript straight y equals 16 over 2 close parentheses space straight i. straight e. comma space MU over straight P subscript straight x equals MU over straight P subscript straight y$

= MU of a rupee or money). Remember, a consumer's maximum satisfaction is subject to budget constraints, i.e., the amount of money to be spent by a consumer.

One major limitation of Utility Approach is that it is measured in cardinal number (i.e., in exact numbers like 1, 2, 3 ....) and also utility being a subjective thing is incapable of being measured in exact numbers.

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Theory Of Consumer Behaviour

‘State and explain the condition of consumer's equilibrium in case of two commodities through utility approach.

Some More Questions From Theory Of Consumer Behaviour Chapter

Distinguish between 'Change in demand' and 'Change in quantity demanded of a commodity'.

Starting from an initial situation of consumer's equilibrium, suppose that marginal utility of a rupee increases. Will it increase or decrease the quantity demanded of the product?

What are two approaches to attain the state of consumer's equilibrium?

Define indifference curve.

What is meant by marginal rate of substitution (MRS)?

Why is MRS always diminishing?

When does a consumer attain equilibrium according to indifference curve approach?

Give meaning of demand.

Name two determinants of demand.

List the factors that cause changes in demand.

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