Support the Monkey! Tell All your Friends and Teachers

Help / FAQ


This can be illustrated with the help of a simple example of two goods. Let X and Y be the goods a consumer wants to consume. Their prices are Px = $4 and Py = $2 respectively. The consumerís allowance or budget is $10. He must spend the entire income so as to maximize his satisfaction from the two goods. His marginal utilities for the two goods and corresponding Mu/P ratios are shown in the table below:

 

Units of good X

Mu of

X

Mux/Px

(Px = $4)

Units of good Y

Mu of

Y

Muy/Py

(Py = $2)

1

48

12

1

18

9

2

36

9

2

16

8

3

24

6

3

12

6

4

12

3

4

6

3

(Equimarginal utility = 102, Total budget = $10)

In order to reach equilibrium and to maximize satisfaction the consumer has to equate Mu/P ratios for the two goods. This happens when he purchases and consumes two units of good X and one unit of good Y. This equilibrium combination has been highlighted in the table. The total expenditure of a consumer is $8 on good X for two units and $2 for one unit of Y. Therefore the total expenditure of $10 coincides exactly with the supposed allowance of the consumer. The total utility that the consumer derives from this combination is

48 + 36 = 84 of X units, and 18 of Y units

i.e. 102 units from the entire combination.

This is the highest level of satisfaction under the given price-income conditions. Any other combination cannot help the consumer to increase his utility further. For instance, if the consumer decides to purchase only one unit of X and decides to spend $4 on it he will attain utility of 48 units from it. The remaining $6 he can then spend on Y to purchase three units of it. From good Y the total utility he attains will be

18 + 16 + 12 = 46 units.

From such a combination the consumerís total utility from the two goods will be:

48 + 46 = 94 units.

This is obviously lower than 102 units of utility from the equilibrium combination. It would be a similar case for any other combination.

(D) Variation in the price: The equimarginal or equiproportional rule helps to establish equilibrium for a consumer-maximizing utility. Such an equilibrium holds good only under the given market conditions. If the price of one of the goods alters the consumer will have to make a readjustment and change the combination. Let us assume that the price of good Y remains the same (Py = $2) as before, but the price of good X rises (from $4 to $6). The consumer will have to readjust the equilibrium.

Index

8.1 Theory Of The Consumer
8.2 Equilibrium Of a Consumer

Chapter 9

All Contents Copyright © All rights reserved.
Further Distribution Is Strictly Prohibited.


Search:
Keywords:
In Association with Amazon.com