Solution

CONSUMER EQUILIBRIUM

Class 11 - Economics

1. (c) Downward sloping straight line

Explanation: Downward sloping straight line
2. (c) Law of diminishing MRS
Explanation: Law of diminishing MRS
3. (d) Amount of good hotdogs given up in exchange for good hamburgers such that total utility is constant
Explanation: Amount of good hotdogs given up in exchange for good hamburgers such that total utility is constant
4. (d) diminishes
Explanation: diminishes

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5. (b) Both the statements are correct
Explanation: Both the statements are correct
6. (a) increasing the consumption of commodity-X

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Explanation: The consumers should move downward to the right along with the IC. Convexity of the IC ensures that as the
consumer moves downward to the right along with his IC, MRS​XY​tends to fall. Implying that the consumer should start
consuming more of X in place of Y.
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7.
(d) Law of diminishing marginal utility
Explanation: Other things remaining the same when a person takes successive units of a commodity, the marginal utility
diminishes constantly
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8.
MU x MU y
(c) Px
=
Py
en
Explanation: Equlibrium condition for double commodity approch is ratio of MU and price of one good must be equal to the
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ratio of MU and price of the other good.

9.
(c) Substitution effect
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Explanation: Consumer substitutes one good for other along IC in order to keep satisfaction level constant.
10.
(d) budget line
Explanation: The budget line is a line that separates attainable combinations from the non-attainable combinations.
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11.
(b) Monotonic preferences of the consumer
Explanation: According to Monotonic preference, more of a Good always leads to higher satisfaction.
12.
(d) Gossen
Explanation: The propounder of law of diminishing marginal utility is Gossen.
13.
(b) Ordinal utility
Explanation: The ordinal utility theory or the indifference curve analysis is based on four main assumptions.
1. Rational behavior of the consumer.
2. Utility is ordinal.
3. Diminishing marginal rate of substitution.
4. Consistency in choice.

14. (a) Only two commodities

Explanation: An indifference curve is a graph showing combination of two goods that give the consumer equal satisfaction

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 and utility.
15.
(b) Utility
Explanation: The ability of satisfying human wants in a goods is called its utility.
16.
(b) Both A and R are true but R is not the correct explanation of A.
Explanation: If MUM rises and Px is constant, the consumer will find his equilibrium only if MUx rises. It will happen only
when the consumption of commodity X is decreased.
17. (a) Both A and R are true and R is the correct explanation of A.
Explanation: The consumer is willing to sacrifice less and less units of a good to gain an additional unit of the other good
because the utility that he gets from consuming an additional unit of a good goes on diminishing.
18. (a) Both A and R are true and R is the correct explanation of A.
Explanation: Both A and R are true and R is the correct explanation of A.

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19.
(c) A is true but R is false.
Explanation: When the prices of both goods fall, the consumer can purchase more goods with the same income level.

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20. (a) Both A and R are true and R is the correct explanation of A.
Explanation: The consumer is confused among various sets of two commodities so such a set of combinations is known as the
Indifference set.
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21.
(d) A is false but R is true.
Explanation: An indifference curve slopes downward from left to right due to the monotonic preferences of a consumer, a
consumer always prefers more of a thing.
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22.
(c) A is true but R is false.
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Explanation: A is true but R is false.
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23. (a) Both A and R are true and R is the correct explanation of A.
Explanation: When income increases price line shifts would shift to the right. The price line must remain parallel to the initial
price line because the slope of both the price ratios will remain the same.
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24. (a) Both A and R are true and R is the correct explanation of A.
Explanation: The equilibrium point is the point where a consumer maximizes his satisfaction because equilibrium is struck
when the slope of the price line is equal to the slope of the indifference curve.
Ed

25.
(c) A is true but R is false.
Explanation: In case of a fall in the money income of the consumer, his budget line would shift to the left because the price
ratios of both the price lines remain the same i.e., constant.
26. State True or False:
(i) (a) True
Explanation: True
(ii) (a) True
Explanation: True. It is assumed that the consumer expresses utility in terms of cardinal numbers like 1, 2, 3 or 4.
This is a serious limitation of utility analysis because this assumption is wide away from the real-life situation.
(iii) (a) True
Explanation: True. Because the marginal unit starts from the 1st unit and ends with the nth unit (last unit) consumed
by the consumer. So that, TU = Σ MU.
(iv) (b) False
Explanation: False. All attainable combinations of Good-X and Good-Y are below as well as along the budget line.
(v) (a) True
Explanation: True

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27. (a) All commodities except money
Explanation: As per Alferd marshall MU of money is constant.
28.
(d) Comforts
Explanation: Consumer surplus is a measure of the welfare that people gain from consuming goods and servicesConsumer
surplus is defined as the difference between the total amount that consumers are willing and able to pay for a good or service
(indicated by the demand curve) and the total amount that they actually do pay .
As per Alferd marshall ,CS can not be calculated for luxary goods, inferior goods and necessities.

29.
(d) Downward to the right
Explanation: In order to increase the consumption of one good,other good must be sacrificed as utility level through out
the indifference cure has to be same.Due to inverse relation between two goods indifference curve slopes downwards from left

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to right.
30. (a) Change the quantity of the commodity
Explanation: By Changing the quantity of the commodity, consumer equilibrium can be achieved.
31.

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(c) Increasing
Explanation: Marginal utility (MU) is the change in total utility due to the consumption of one additional unit of a
commodity.
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Total utility and marginal utility can also be related in the following way.
TUn = MU1 + MU2 + … + MUn-1 + MUn
This simply means that TU derived from consuming n units of a product is the sum total of marginal utility of first product
(MU1), the marginal utility of second product (MU2 ), and so on, till the marginal utility of the n-th unit.
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32. i. Flour represents good Y and vegetables represent good X

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ii. The rise in the price of flour will shift the budget line towards left to B"L.

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33. Yes. As the consumer increases the consumption, the marginal utility derived from the consumption of a commodity must
diminish as more units of that commodity are consumed at a point of time, and even can be negative. But the total utility or total
satisfaction derived from that commodity can never be negative. A rational consumer would never buy a commodity that offers
only negative satisfaction.
34. The indifference set refers to those combinations of two goods that offer the consumer the same level of satisfaction.
35. Budget set is the collection of all bundles of two goods that a consumer can buy with his income at the prevailing market prices.
36. Indifference map refers to the family of indifference curves that represents consumers preferences over all the bundles of two
goods.
37. The marginal utility of money refers to the utility that the consumer expects to obtain from a standard basket of goods that he or
she can buy for a rupee.
38. Budget line is a graphical representation of all possible combinations of two goods which can be purchased with given income
and prices, such that the cost of each of these combinations is equal to the income of the consumer. Budget line is a downward
sloping line. Equation of the budget line is:
Px . Qx + Py . Qy = M,

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Where, Px = Price of good X
Py = Price of good Y
Qx = Quantity of good X

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Qy = Quantity of good Y
M = Money income.
39. True. An IC slopes downward because of the monotonic preferences of the consumer. According to this, more of one commodity
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implies less of the other, so that total satisfaction remains the same. An IC, therefore, must slope downward.
40. Budget set refers to the set of all possible combinations of the two goods which a consumer can afford at his given income and
prices in the market. Equation of budget set is:
PX.QX + PY.Qy≤ M,
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ab

Where PX is the price of good X

QX is the quantity of good X
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PY is the price of good Y
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QY is the quantity of good Y.

41. Units Consumed TU MU

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0 0 -

1 15 15

2 28 13
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3 40 12

4 51 11

5 61 10
42. The budget line is a line that separates attainable combinations from the non-attainable combinations. Budget set refers to
attainable combinations of a set of two goods, given the market price of the goods and income of the consumer.
Budget Set Budget Line

(i) Budget set is defined in terms of this

(i) Budget line is defined in terms of this equation:
equation:
P1X1 + P2X2 = Y
P1X1 + P2X2 ≤ Y

(ii) Budget set includes all combinations of (ii) Budget line includes only such combinations of goods X and Y (given their
goods X and Y (given their prices) on which prices) on which the actual expenditure by the consumer is exactly equal to his
the actual expenditure is equal to or less than given income. Specifically, it does not include such combinations which are
the given income of the consumer. attainable but where: consumer's expenditure < consumer's income.
43. Diminishing Marginal Rate of Substitution means that a consumer is willing to sacrifice less and fewer units of a good to obtain
an additional unit of the other good. Marginal rate of substitution diminishes because of the law of diminishing marginal utility.

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 For example, the given schedule shows various combinations of two goods, good X and good Y which Rahul can buy from his
given income.
Good Good
Combinations Marginal Rate of Substitutions (MRS)
X (units) Y (units)

A 1 8 __

B 2 4 4: 1

C 3 2 2: 1

D 4 1 1: 1
In the given above example of good X and good Y, combination A has only one good X and, therefore, good X is relatively more
important than good Y. Due to this, Rahul is willing to give up more of good Y for an additional good X. But as he consumes
more and more of good X, his marginal utility from good X keeps on declining. As a result, he is willing to give up less and less
of good Y for each good X. Hence, in the above example, we can observe a diminishing marginal rate of substitution.

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44. If price of good 2 (shown on y-axis) decreases and the price of good 1 remain unchanged, consumer can buy more units of good 2.
The budget line AB will pivot at B and rotate upwards to A1B.

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45. A consumer consuming two goods is in equilibrium if,

Marginal Utility of X( MUX ) Marginal Utilty of Y( MUY )
=
Price of X( PX ) Price of Y( PY )
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Now, by substituting the values of given variables,we get
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3 4
≠
4 4

On substituting the given variables, we find that the consumer is not in equilibrium.
In the given instance,
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MUX MUY
<
PX PY

Since the consumer is getting more utility from the consumption of good Y, therefore consumer will increase the consumption of
good Y and decrease the consumption of good X. Because of this, Marginal Utility derived from additional units of good Y will
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MUx MUY
fall and that of X will rise, till the time the equilibrium is restored and PX
=
PY

[It is assumed that Marginal Utility of Money (MUm) is one.]

46. This situation implies that by spending a rupee on Good-X, the consumer gets greater marginal utility than in the case of Good-Y.
Accordingly, he will spend more on X than Y. As consumption of X rises, MUX will fall. On the other hand, as consumption of Y
MUX MU
falls, MUY will rise. The consumer will stop buying more of X in place of Y only when PX
––
=
Y

PY
.
47. True. Diminishing MRS suggests that the consumer sacrifices less and less quantity of Good-Y for every additional unit of Good-
X. Why does he do it? It is because the rising consumption of Good-X leads to a fall in its MU, while the falling consumption of
Good-Y leads to a rise in its MU. This is in accordance with the law of diminishing marginal utility.

48.

Consider points R (on the lower IC) and S (on the higher IC).

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 Both at R and S, the consumer has an OK amount of Good-Y. But at S, the consumer has OL1 amount of Good-X which is greater
than OL (the amount of Good-X at point R).
We know, more of a good means more satisfaction.
Hence, the conclusion that IC2 offers a higher level of satisfaction than IC1.
49. Indifference Curve refers to the graphical representation of various alternative combinations of bundles of two goods among
which the consumer is indifferent. Alternately, the indifference curve is the locus of points that show such combinations of two
commodities which give the consumer the same level of satisfaction.
Indifference curve is convex to the point of origin because of Diminishing Marginal Rate of Substitution. For every additional unit
of a good, a consumer is willing to give up less and less amount of another good as the utility that he derives from its consumption
goes on diminishing.
50. On the basis of the following conditions a consumer decides how much quantity of that good to buy if price of a good is given :
MUX
(i) MUM
= PX

(ii) Total gain falls as more is purchased after equilibrium:

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If, MUX (money) > Px If, MUX(money) < Px

Consumer keeps on consuming more units. Consumer will decrease the consumption of X.
When he consumes more units, the When he decreases the consumption of X, the

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additional utility derived from consuming X Marginal Utility of X will increase. He will
keeps on falling. He keeps on consuming till keep on decreasing consumption of X till MUX
MUX = Px. = Px.
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Thus, MUX(money) = Px is the condition for consumer's equilibrium in a single commodity case.
51. Following are the properties of an indifference curve
i. Indifference curves are always convex to the origin: Due to decreasing MRS, MRS declines continuously because of the
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law of diminishing marginal utility.

ii. Indifference curves never touch or intersect each other: Each indifference curve shows a different level of satisfaction.
Intersection point shows the same satisfaction level which is not possible.
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iii. A higher indifference curve represents a higher level of satisfaction: Due to monotonic preferences, higher indifference
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curve shows bundles having more of one commodity and not less of other good in comparison of la ower indifference curve.
iv. Indifference curve slope downwards: It implies that as a consumer consumes more of one good, he must consume less of
the other good.
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52. According to the indifference curve analysis, consumer's equilibrium is at a point where the slope of the indifference curve is
equal to the slope of the budget line or the price line.
The conditions of the consumer's equilibrium are
i. The given price line should be tangent to an indifference curve or marginal rate of satisfaction of good X for good Y (MRSxy)
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Px
must be equal to the price ratio of the two goods. i.e.MRSxy =
Py
, where
MRSxy = Marginal Rate of Substitution of good X and good Y
Px = Price of good X
Py = Price of good Y, and
ii. At the point of equilibrium, the indifference curve must be convex to the origin. It implies that at the point of equilibrium,
MRS must be diminishing.

In the diagram given, P is the equilibrium point at which budget line touches the Indifference Curve IC2.
iii. The consumer’s consumption decision is explained by combining the budget line and the indifference map
53. There are two conditions of consumer equilibrium.

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 MUx MUy
i. Px
=
Py

MUx MUy
If Px
>
Py
the consumer is not in equilibrium because he can raise his total utility by buying less of Y and more of X
MUx MUy
and vice versa in case of Px
<
Py
.
ii. MU falls as consumption increases : If MU does not fall as consumption increases the consumer will end up buying only good
which is unrealistic or consumer will never reach the equilibrium position.
54. According to the law of equi-marginal utility, a consumer strikes his equilibrium when:
MUX MUY
= = MUM
PX PY

Let X be coffee and Y be tea.

When PX rises,
MUX MUY

PX
<
PY
[The equilibrium is disturbed]
A rise in the price of X in relation to V will induce the buyer to buy less of X and more of Y. When less of X is
purchased/consumed, MUX will rise. When more of Y is purchased, MUY will fall. The shift from X to Y will continue till

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MUX MUY

PX
=
PY
.
Briefly, when PX rises, less of X and more of Y will be purchased.
55. The given statement is refuted. When Marginal Utility is positive till point Q as shown in figure of Question 1, the total Utility

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increases but at a diminishing rate and when Marginal Utility becomes negative after point Q, total Utility decreases.
56. Law of Diminishing Marginal Utility
This law states that as more and more standard units of a commodity are continuously consumed, the Marginal Utility obtained
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from each successive unit goes on diminishing. This law is also called as a 'Fundamental Law of Satisfaction' or 'Fundamental
Psychological Law'.
Utility Schedule
Units Consumed Total Utility (TU) Marginal Utility (MU)
ka
ab

0 0 __
1 8 8-0=8
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2 14 14 - 8 = 6
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3 18 18 - 14 = 4
4 20 20 - 18 = 2
5 20 20 - 20 = 0
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6 18 18 - 20 = -2
The above schedule shows that with the consumption of successive units of a commodity, the level of satisfaction falls and also
becomes negative, or in other words. Marginal Utility tends to decline as consumption of the commodity increases.
Ed

The above law is based upon certain assumptions. It is assumed that the units consumed should be identical in all respects and
consumption should be continuous. Also, Marginal Utility of money, consumer’s income and price of the goods are assumed to be
constant.
57. As we know condition for consumer equilibrium for two commodities is -
Marginal utility of last rupee spent on each commodity is same.
Suppose there are two commodities, X and Y respectively.
So, for commodity X, the condition is,
Marginal Utility of Money = Price of X
M arg inal U tility of a

Pr oduct in U til [MUx ]

or
M arg inal U tility of

One Rupees [MUR ]

MUx
or Px
= M UR ...(i)
Similarly, for commodity Y, the condition is,
MUy

Py
= M UR ...(ii)
Putting equation (2) in (1), we get
MUx MUy

=
Px Py

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 But it is given that the price of X falls , because of which the consumer will buy more of good X as utility from good X is higher.
MUx MUy
So, the ratio of marginal utility to price in case of X will become higher than that in case of Y, i.e., Px
>
Py

It means marginal utility from the last rupee spent on commodity X is more than marginal utility from the last rupee spent on
commodity Y. So, to attain the equilibrium the consumer must increase the consumption of X, which in turn will decrease the MU
derived from X and decrease the consumption of Y, which will increase the MUy. Increase in consumption of X and decrease in
MUx MUy

consumption of Y continue till Px

=
Py
and thus equilibrium is attained. .
58. Budget line is a line showing different combinations of two goods which a consumer can buy or afford, at his given income and
market price of the goods. The Budget Line also called as Budget Constraint. Consumer theory uses the concepts of a budget
constraint and a preference map to analyze consumer choices. The equation of the budget line is:
Px . Qx + Py . Qy = M,
Where Px = Price of good X
Py = Price of good Y

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Qx = Quantity of good X
Qy = Quantity of good Y
M = Money income.
It can shift to the right when the consumer is able to increase the consumption of both the goods. It will be possible due to the

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following reasons:
i. When the level of income increases,the consumer will be able to buy more bundle of goods,which were previously not
possible.
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ii. When prices of both the goods fall,the consumer can now purchase more goods with the same income level.

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ab
en
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59. Every IC is based on the assumption that various combination of two commodities gives equal satisfaction to a consumer. In order
to remain at the same level of satisfaction, the consumer will have to reduce the consumption of one commodity if he wants to
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increase the consumption of another commodity. This means that the consumption of good X is negatively related to consumption
of good Y and this implies that IC slopes downwards from left to right.
Ed

60. The Law of Diminishing Marginal Utility states that as a consumer consumes successive units of an identical commodity, then
Marginal Utility derived from an additional unit goes on declining. This implies that as a consumer's utility is declining, then he
would not be willing to buy an additional unit at the same price But, if the good is offered to him at a reduced price, then this will
induce him to increase his consumption and lead to the fulfillment of Law of Demand which states that as price falls, demand
increases and vice-versa. So, we can say that price and demand of a commodity are inversely related due to Law of Diminishing
Marginal Utility. A consumer maximizes utility by equating the marginal utility-price ratio for each good purchased and
consumed. If the ratios are not equal, then utility can be increased by changing the combination of goods consumed.
61. The law states that as more and more units of a commodity are consumed, the marginal utility derived from every additional unit
declines.
Quantity of X Total Utility Marginal Utility
1 50 50

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 2 90 40
3 120 30
4 140 20
5 150 10
It can be seen from the above schedule that even though the total utility increase , the marginal utility keeps declining with the
consumption of an additional unit. The marginal utility which was 50 for the first unit has decreased gradually to 10 for the 5th
unit.
62. If the consumer's income increases to ₹ 40, the consumer can buy more of both the goods. It will shift the budget line towards
right from AB to A1B1. But the new budget line will be parallel to the old budget line. See the figure below:

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Rlgitward Shift: Budget Line shifts to the right from AB to A1B1 due to increase in income
Leftward Shlft: Budget Line shifts to the right from AB to A2B2 due to decrease in income

Cardinal Utility Ordinal Utility

63.
ka
ab

(i) According to cardinal utility analysis utility can be (i) According to ordinal utility approach utility cannot be
measured in cardinal numbers line 1, 2, 3, 4 etc. measured in numbers it can be only compared.
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(ii) This theory is explained with the Marginal Utility. (ii) This theory is explained through the indifference curve.
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(iii) The economist like Marshall, Jevon, etc. used this to (iii) The economist like Hicks and Allen have used this
analyse consumer equilibrium. approach to analyse consumer equilibrium.
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(iv) ‘Utility’ is measured on the basis of ‘utils’. (iv) ‘Utility’ is ranked on the basis of "satisfaction".

(v) Cardinal utility is less practical. (v) Ordinal utility is more practical and sensible.
64. A consumer is in equilibrium when he derives maximum satisfaction from the goods and is in no position to rearrange his
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purchases.
Assumptions:
i. There is a defined indifference map showing the consumer’s scale of preferences across different combinations of two goods
X and Y.
ii. The consumer has a fixed money income and wants to spend it completely on the goods X and Y.
iii. The consumer acts rationally and maximizes his satisfaction.
As per single commodity equilibrium condition, consumer purchases that much quantity of good at which Px = MUx (in terms of
money).

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 esh
Accordingly, Px and MUx can be taken as identical to each other corresponding to a particular quantity of commodity-X
purchased by the consumer. Law of Diminishing Marginal Utility states that MUx tends to decline as more and more of X is
consumed. Because Px and MUx are identical, Px must also be declining as more and more of X is consumed or purchased. Thus,

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we have two inverse relationships indicated by the same line (as in Fig.):
i. An inverse relationship between MUx and Qx, which produces the MU curve and indicates the Law of Diminishing Marginal
Utility.
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ii. An inverse relationship between Px and Qx which produces a demand curve indicating the Law of Demand. Since, both these
relationships are indicated by the same line, we can say that MU curve is identical with demand curve, or the Law of
Diminishing Marginal Utility is identical with the Law of Demand. Thus, Fig. shows that MUx (°n vertical axis) reduces as
Qx increases. It also shows that as Px reduces, Qx increases.
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ab

65. A consumer is said to be in equilibrium when he feels that he " cannot change his condition either by learning more or by
spending more or by changing the quantities of thing he buys".
If this condition is not fulfilled the consumer will either purchase more or less. If he purchases more, MU will go on falling and a
en
situation will develop where the price paid will exceed MU. In order to avoid negative utility, i.e., dissatisfaction, he will reduce
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consumption and MU will go on increasing till P = MU.

Consumer’s equilibrium with a single commodity is explained with the Law of Diminishing Marginal Utility. The consumer will
go on purchasing additional units of a commodity so long as the marginal utility
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of the commodity becomes equal to price (MUx = Px). If MUx > Px

The consumer will buy more ol good because his gain is more than the cost. But as he increases consumption of X, MU falls (Due
to law of DMU) and ultimately MUx = Px If MUx < Px
Ed

The consumer will buy less ol good X because his gam is less than the cost, But as he decreases consumption of x, MU increases
and ultimately MUx=Px
Schedule showing consumers equilibrium in case of single commodity:
Surplus = Utility
Units of X Utility gained from consumption of 'X' Utility of X sacrificed in terms of
derived - Utility Remarks
(1) good or MUX (2) Price of X (3)
sacrificed (4)

1 50 20 30 MUx>Px

2 40 20 20

3 30 20 10

4 20 20 0 MUx=Px

5 10 20 - 10 MUx<Px
Suppose the Price of a commodity ‘X’ is Rs.1 per unit which in terms of utility is taken as equal to 20 and remains constant
(MUm = 20). When the consumer buys 4 units of commodity ‘X’, then the marginal utility gained from the consumption and the
marginal utility sacrificed in terms of its price are equal to each other. At this point, the consumer is in equilibrium because here
utility gained = utility sacrificed (in terms of price of the commodity.)

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66. Consumer Equilibrium : It is a situation when the consumer gets maximum satisfaction with the given income and the given
market prices. Indifference curve approch of consumers equillibrium: According to the indifference curve analysis, consumer's
equilibrium is at a point where the slope of indifference curve is equal to the slope of budget line or price line.
Two conditions of the consumer's equilibrium are :
i. Indifference curve must be tangent to the budget line which means that the slope of indifference curve Should be equal to the
slope of budget line. Marginal Rate of Substitution of X on Y= ratio of the prices of the two goods i. e.
Price of X( Px )
(M RSxy ) =
Price of Y (Py )

ii. At the point of MRS =Px/Py, indifference curve must be convex to the origin. It implies that at the point of equilibrium, MRS
must be diminishing i.e. the rate at which one good is sacrificed for another should be falling.
In the diagram given, P is the equilibrium point at which budget line touches the higher Indifference Curve IC2, within the
consumer budget.

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Point A could not be the point of equilibrium because at point A, MRS > Px / Py. Hence consumer will prefer to consume
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more of good X and less of good Y, as a result, Marginal utility of X (MUX) will fall and Marginal utility of Y (MUy) will
rise, this process will continue till the time MRS =PX/Py.
At point B MRS < Px/Py, hence consumer will demand more of good Y and less of good X. Because of this MUX will rise
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and MUy will fall till the time MRS =PX/Py. So, the consumer will be at equilibrium only at point P.
67. A consumer will be in equilibrium according to cardinal utility approach when following condition gets fulfilled :
en
MUx MUy
= = M Um
Px PY
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Now as per the given information in the question,

M U = 5, M U = 4, P = 4, P = 5 .
x y x y

Now,assuming Marginal Utility of Money to be one and on substituting the above variables in the condition specified above, we
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get
MUx MUy
5 4
= and =
Px 4 Py 5

MUx MUy

We also observe that .

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≠
Px Py

The above inequality shows that:

MUx MUy MUR MUy 5

Px
is greater than Py
⇒
Px
>
Py
or
4
>
4

This implies that consumer will get more satisfaction from every rupee spent on consumption of good X than on good Y. As a
result of which Consumption of good X will rise and that of good Y will fall. Further,decreased consumption of good Y will cause
MUx
rise in MUy and increased consumption of good X will cause fall in MUX, this process will continue till the time the ratio of Px

MUy

becomes equal to the ratio of Py

.
68. Given,
1. Price of good X (Px) = Rs 40
2. Price of good Y (Py) = Rs 20
3. Income of the consumer (M) = Rs 200
Let the number of units consumed of good X (Qx) = x, and the number of units consumed of good Y (Qy) = y
a. Equation of budget line is written as
Px. Qx +Py .Qy =M (Income)
On substituting the variables, we get:

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 40x + 20y = 200
b. Two combinations of X and Y which lie on budget line are:
1 unit of X and 8 units of Y
2 units of X and 6 units of Y
These combinations cost exactly Rs 200.
c. Two combinations which are a part of budget set but do not lie on budget line are:
1 unit of X and 6 units of Y
2 units of X and 4 units of Y
These combinations cost less than Rs 200.
69. A consumer is said to be in equilibrium when he feels that "he cannot change his condition either by earning more or by spending
more by changing the quantities of thing he buys".
If this condition is not fulfilled the consumer will either purchase more or less. If he purchases more, MU(Marginal Utility) will
go on falling and a situation will develop where the price paid will exceed MU(Marginal Utility). In order to avoid negative

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utility, i.e., dissatisfaction, he will reduce consumption and MU(Marginal Utility)will go on increasing till P(Price) =
MU(Marginal Utility).
According to the Law of Equi-Marginal Utility, the consumer spends his limited income on different goods in such a way that
marginal utility derived by all commodities are equal,

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(Marginal Utility of Good X) MUx = MUy (Marginal Utility of Good Y)= MUz (Marginal Utility of Good Z..........
Explanation: Let us now discuss the Law of Equi- Marginal Utility with the help of a numerical example: Suppose, the total
money income of the consumer = Rs.5.
Go y S
Price of good X and Y = Rs. 1 per unit.
So, a consumer can buy maximum 5 units of ‘X’ or 5 units of Y. The given table shows the marginal utility which the consumer
derives from various units of ‘X’ and ‘Y'.
Table - Consumer's Equilibrium - 2 Commodities
ka
ab

Unit MUx 'X' (in utils) MUy 'Y' (in utils) Money Spent TU

1 20 16 Good X 20
en
2 14 12 Good Y 16
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3 12 8 Good X 14
4 7 5 Good X 12
5 5 3 Good Y 12
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Total - 74
From the table, it is obvious that the consumer will spend the first rupee on commodity 'X', which will provide him the utility of
20 utils. The second rupee will be spent on commodity 'Y’ to get a utility of 16 utils. To reach the equilibrium, a consumer should
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purchase that combination of both the goods, when:

i. MU(Marginal Utility) of the last rupee spent on each commodity is the same; and
ii. MU(Marginal Utility) falls as consumption increases. It happens when a consumer buys 3 units of 'X' and 2 units of 'Y'
because:
a. MU(Marginal Utility) from last rupee (i.e., 5th rupee) spent on commodity Y gives the same satisfaction of 12 utils as
given by last rupee (i.e., 4th rupee) spent on commodity X; and
b. MU(Marginal Utility) of each commodity falls as consumption increases.
The total satisfaction of 74 utils will be obtained when the consumer buys 3 units of 'X’ and 2 units of 'Y'. It reflects the state of
the consumer’s equilibrium. If the consumer spends his income in any other order, total satisfaction will be less than74 utils.
70. Consumer's equilibrium refers to a situation wherein a consumer gets maximum satisfaction out of his given income and he has no
tendency to make any change in his existing expenditure.
For one-commodity case: Rupee worth of satisfaction actually received by the consumer is equal to the marginal utility of money
as specified by the consumer himself.
Condition 1: MU(of good X) = MU(of money) OR , PRICE(of good X) = MU(of money)
Reason: Price paid by the consumers should be exactly equal to the money value of MU that he derives. In case P(of X) is lesser
than the MU(of money), he should be prompted to buy more of good X. Higher consumption will lead to a fall in MU. The
consumption of good X would stop only when P(of good X) will be equal to MU(in terms of money). Likewise, if P(of X) is

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 greater than MU(in terms of money), the consumer will be prompted to buy less of good X, leading to a fall in MU.
Condition 2: Marginal utility of money remains constant.
Condition 3: Law of marginal utility holds good.
For two-commodity case: Rupee worth of marginal utility of money should be same across good X and good Y, and equal to
marginal utility of money.
Reason: In case rupee worth of satisfaction (MU of good X/ price of good X) is greater for good X than good Y, the consumer
will be prompted to buy more of good X and less of good Y. This would lead to a fall in marginal utility of good X and a rise in
marginal utility of good Y. This process would continue till MU(of good X)/ Price of good X = MU(OF GOOD Y)/ Price of good
Y = MU(of money). In case rupee worth of satisfaction (MU of good y/ price of good Y) is greater for good Y than good X, the
consumer will be prompted to buy more of good Y and less of good X. This would lead to a fall in marginal utility of good Y and
a rise in marginal utility of good X.
71. Consumer's equilibrium:
Consumer's equilibrium is at a point where the slope of the indifference curve is equal to the slope of the budget line or price line
according to indifference curve analysis.

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Two conditions of the consumer's equilibrium are mentioned below:
i. Marginal Rate of Substitution of X on Y :
Price of X( Px )
(M RSxy ) =
Price of Y (Py )

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ii. Indifference curve must be convex to the origin at the point of equilibrium. It implies that at the point of equilibrium, MRS
must be diminishing.
Graphical presentation:
Go y S
i. In the graph presented below, P is the equilibrium point at which budget line touches the higher Indifference Curve IC2,
within the consumer budget.
ii. Point A could not be the point of equilibrium because at point A, MRS > Px / Py hence consumer will prefer to consume more
of good X and less of good Y, as a result Marginal utility of X (MUX) will fall and Marginal utility of Y (MUy) will rise, this
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ab

process will continue till the time MRS =PX/Py.

iii. MRS hence consumer will demand more of good Y and less of good X at point B.Due to this MUX will rise till the time MRS
en
=PX/Py. So, the consumer will be at equilibrium only at point P.
dd
uA
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The following changes will take place if the given conditions are not fulfilled :
Px
i. In a situation, whenM RS xy >
Py
,the consumer will consume more of good X by sacrificing units of good Y. Because of this
marginal utility of good X will fall and that of good Y will increase till equilibrium is restored.
Px
ii. In a situation, when MRSxy the P < Py
consumer will consume more of good Y by sacrificing units of good X. Because of
this marginal utility of good Y will fall and that of good X will increase till equilibrium is restored.

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