A consumer consumes only two goods X and Y and is in equilibrium. Show that when the price of good X rises, the consumers buys less of good X.
A consumer consumes only two goods X and Y and is in equilibrium. Show that when the price of good X rises, the consumers buys less of good X. Use utility analysis.
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According to the utility analysis, the consumer is in equilibrium when
MUx/Px=MUy/Py=MUm
Now, given that Px rises, then
MUx/Px< MUy/Py
Since per rupee MUx is lower than per rupee MUy, the consumer will buy less of X and more of Y.
It show that when Px rises, demand for X falls.
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