Consumers Equilibrium Through Utility Approach

1 Mark Question

1. What is meant by consumer's equilibrium? (Delhi 2011c, 2010,2009)

Ans. Consumer's equilibrium refers to a situation wherein a consumer gets maximum satisfaction from the purchase of the commodity with the given income.

3 Marks Questions

1. A consumer consumes only two goods and is in equilibrium. Show that price

and demand for a good are inversely related. Explain using utility analysis. or

A consumer consumes only two goods x and y and is in equilibrium. Price of x falls. Explain the reaction of the consumer through the utility analysis. (All

India 2012)

Ans. If the price of x falls, the consumer gets greater Marginal Utility than in case of good y. Accordingly, he will spend more on x than y. As consumption of x rises, MU_x will fall. On the other hand, as consumption of y falls, MU_v will rise. The consumer will stop buying more of x in place of y only when

<math>MU_x - MU_x</math> <math>P_x</math>

Hence, we can only say that price and demand are negatively related.

1. Explain the conditions of consumer's equilibrium with the help of utility analysis.(Delhi 2013)

or Explain the conditions of consumer's equilibrium under utility analysis.(All India 2013)

Ans. Conditions of consumer's equilibrium using utility approach are as follows:

(i) In case of single commodity, <math>\frac{MUX}{R} = MU</math> of money

In case of two commodities, <math>\frac{MU_x}{P_x} = \frac{MU_y}{P_y} = MU</math> of money

Where, <math>MU = Marginal Utility</math>

<math>P = Price</math>

Where, <math>MU_x</math> is Marginal Utility of commodity x; <math>MU_y</math> is Marginal Utility of commodity y; <math>P_x</math> is price of commodity X and <math>P_y</math> is price of commodity y.

1. Marginal Utility of money remains constant.
2. Law of Diminishing Marginal Utility must hold good, implying that Marginal Utility must decline as more of a commodity is consumed.
3. If a price of a good is given, how does a consumer decide as to how many units of that good to buy? Explain. (hots; Delhi 2012; All India 2009,2008)

Ans. Given price of a good, a consumer decides on the basis of the following conditions:

MU = Price, i.e. <math>\frac{MU_X}{MU_{AA}} = P_X</math>

Total gain falls as more is purchased after equilibrium.

If <math>MU_x > P_x</math>

Consumer keeps on consuming more units. When he consumes more units, the additional utility derived from consuming x keeps on falling. He keeps on consuming till

<math>MU_x = P_x If</math> <math>MU_x < P_x</math>

He will decrease the consumption of x. When he decreases the consumption of x, the Marginal Utility of x will increase. He will keep on decreasing consumption of x till <math>MU_x =</math> <math>P_{x}</math>.

Thus, <math>MU_x = P_x</math> is the condition for consumer's equilibrium in a single commodity case.

1. What is meant by consumer's equilibrium? State its condition in case of a single commodity. (Delhi 2006)

Ans. Consumer's equilibrium refers to a situation wherein a consumer gets maximum satisfaction from the purchase of the commodity with the given income.

Given price of a good, a consumer decides on the basis of the following conditions:

MU = Price, i.e. <math>\frac{MU_x}{MU_M} = P_x</math>

Total gain falls as more is purchased after equilibrium.

If <math>MU_x > P_x</math>

Consumer keeps on consuming more units. When he consumes more units, the additional utility derived from consuming x keeps on falling. He keeps on consuming till <math>MU_X = P_X If</math> <math>MU_X < P_X</math>