Practicing Success
If $\frac{MU_X}{P_X}> \frac{MU_Y}{P_Y};$ the consumer will : |
Decrease consumption of X, increase consumption of Y Increase consumption of X, decrease consumption of Y Increase consumption of X and Y Decrease consumption of X and Y |
Increase consumption of X, decrease consumption of Y |
The correct answer is option (2) : Increase consumption of X, decrease consumption of Y $\frac{MU_X}{P_X}> \frac{MU_Y}{P_Y};$ suggests that the consumer perceives X to be relatively cheaper in terms of the satisfaction or utility derived per unit of expenditure compared to Y. Thus, the consumer will substitute good 'x' for good 'y'. The consumer will continue substituting good 'x' for good 'y' till $\frac{MUx}{Px}=\frac{MUy}{Py}$ where the consumer will be in equilibrium. |