Assume MUx = 1,000 utils, Px = $50, MUy = 250 and Py = $20. Are...

Assume MU_x = 1,000 utils, P_x = $50, MU_y = 250 and P_y = $20. Are we experiencing consumer equilibrium? If not what should we do?

Expert Solution

Answer :

MUx = 1000, Px = $50

MUy = 250, Py = $20

MUx/Px = 1000/50 = 20

MUy/Py = 250/20 = 12.5

So we see, MUx/Px > MUy/Py and therefore the consumer is not in equilibrium. By the law of equi marginal utility the consumer will be in equilibrium only when MUx/Px = MUy/Py

So from here the consumer can reach equilibrium by consuming more of X instead of Y, this will bring down the value of MUx and raise the value of MUy by the law of diminishing marginal utility. The consumer will have to keep on substuting good X for Y in order to reach that equality where the equilibrium lies, that is :

(MUx/Px) = (MUy/Py)

Rahul Sunny answered 2 years ago

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