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Consumer's Equilibrium - Doctrine Of Equi-Marginal Utility

 Consumer's Equilibrium - Doctrine of Equi-Marginal Utility

Illustration 24

Observe the below tablet.

Units

MUA in Utils

MUB in Utils

1

50

60

2

40

48

3

30

36

4

20

24

5

10

12

The prices of goods A and B are $5 and $4 respectively. Restructure the above tablet by dividing marginal utilities MUA of A by $5 and marginal utilities MUB of B by $4.

Also determine the equilibrium position where the consumer optimises his utility when he expends $31 on both products mutually.

Solution

Units

MUA
PA

MUB
PB

1

10

15

2

8

12

3

6

9

4

4

6

5

2

3

When the consumer expends $31 mutually on both the products, he will equate the marginal utility of the last dollar of money spent on the two commodities.

In the above restructured tablet, we come to know that MUA parities 6 utils when
                                                                                            PA
consumer purchases 3 units of commodity A and MUB parities 6 utils when he
                                                                               PB
purchases 4 units of commodity B.

    Thus, consumer is in equilibrium when he is purchasing 3 units of commodity A and 4 units of commodity B and will be expending (5 * 3) + (4 * 4) = $31 on them that parities to consumer’s provided income.

Hence, in the equilibrium position where the consumer optimises his utility will be as below.

            MUA    =                 MUB     =             MUm
              PA                           PB

            30        =          24        =          6
              5                      4

    Therefore, the marginal utility of last dollar spent on every of the two commodities he buys is the same which is 6 utility. As the marginal utility curves of commodities incline downwards, curves portraying MUA          and         MUB also incline
                                                                                                             PA                            PB
downward. Therefore, when the consumer is purchasing 3 units of A and 4 units of B, then,

                                     MUA    =          MUB     =             MUm
                                      PA                      PB

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