Question

we'vr learned that the consumer ms utility maximizing choice is where the ratio of the marginal utility of two good are equal to each other (Mux/px=Muy/py).what does this condition mean and wht is it the utility maximizing choice?explain

Answer 1

MUx/Px means the utility that the consumer gets if an additional dollar on Good X is spent.

MUy/Py means the utility that the consumer gets if an additional dollar on good Y is spent.

This condition implies that the consumer gets equal amount of utility from both good X and Y if additional dollar is spent on both goods.

Case 1; If MUx/Px > MUy/Py

In this case, consumer gets more satisfaction from consuming good X. So, he will continue spending more on X.

Case 2: if MUx/Px< MUy/Py

In this case, consumer gets less satisfaction from consuming good X. He will spend more on good Y as each additional $ gives more satisfaction

Utility maximizing choice is that choice at which the condition MUx/Px = MUy/Py holds true. At this condition, the slope of the Indifference Curve (MRS) and the slope of the Budget line (Px/PY) are equal to each other.

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