If the MU of the last unit of X consumed is twice the MU of the...

If the MU of the last unit of X consumed is twice the MU of the last unit of Y consumed, the consumer is in equilibrium only if (a) the price of X is twice the price of Y, (b) the price of X is equal to the price of Y, (c) the price of X is one half of the price of Y or (d) any of the above is possible.

Expert Solution

The law can be explained with the help of an example. Suppose a consumer wants to spend his limited income on Apple and Orange. He is said to be in equilibrium, only when he gets maximum satisfaction with his limited income. Therefore, he will be in equilibrium when,

Marginal utility of Apple / price of Apple = marginal utility of orange / price of orange = K

K - constant marginal utility of money

With the above explanation,

Option A is the correct answer as the MU of X is twice the MU of Y, the price of X must be twice the price of Y to be in equilibrium

Whereas in option B, the price of X will be equal to the price of Y which will not result in equilibrium.

Whereas in option C, price of X is one half of the price of Y which again will not result in equilibrium.

Rahul Sunny answered 2 years ago

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