Question

Assume MUx = 1,000 utils, Px = $50, MUy = 250 and Py = $20. Are we experiencing consumer equilibrium? If not what should we do?

Answer 1

Consumer equilibrium occurs when the marginal utility per dollar spent on each good is equal. To reach consumer equilibrium, the individual should consume less of good X and more of good Y until the marginal utility per dollar spent on each good is equal.

Step-by-step explanation:

Consumer equilibrium occurs when the marginal utility per dollar spent on each good is equal. To determine if we are experiencing consumer equilibrium, we need to compare the marginal utility per dollar of the two goods. In this case, MUx/Px = 1,000/50 = 20 utils per dollar for good X and MUy/Py = 250/20 = 12.5 utils per dollar for good Y.

Since the marginal utility per dollar spent on good X is higher than that of good Y, we are not experiencing consumer equilibrium. To reach consumer equilibrium, the individual should consume less of good X and more of good Y until the marginal utility per dollar spent on each good is equal. This will maximize total utility.