question_answer

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.

Answer:

The basic condition fulfilling the condition of consumer?s equilibrium when two commodities according to utility analysis is:

\[\frac{M{{U}_{x}}}{{{P}_{x}}}=\frac{M{{U}_{y}}}{{{P}_{y}}}\]

If the price of X falls, per rupee marginal utility of X will increase and becomes more than of Y. the consumer will transfer expenditure from Y to X, and will buy more of X.