Question

A consumer consumes two goods, good X and good Y. Prices of the two goods are Px and Py respectively. Explain how consumer reaches equilibrium in the consumption of two goods.

Answer 1

Answer:

Explanation:

In the case of two goods, a consumer's equilibrium is attained at the point when the utility gotten from each additional unit or money spent on each of the goods are equal. That is, Marginal Utility of a dollar spent on the good x that is, MUx/Px equals to the marginal utility of dollar spent on good Y i.e MUy = Py which is also equal to the marginal utility of money.

In such a case when either the marginal utility of x or y is different, the consumer will rearrange his consumption combination till the equality is restored again.