Practicing Success

Target Exam

CUET

Subject

Economics

Chapter

Micro Economics: Theory of Consumer behaviour

Question:

If \(\frac{MUx }{ Px}\) > \(\frac{ MUy}{Py }\), how will a consumer react?

Options:

Decrease consumption of good Y

Increase consumption of good X

Both a and b

None of the above

Correct Answer:

Both a and b

Explanation:

If \(\frac{MUx }{ Px}\)  > \(\frac{ MUy}{Py }\), then there are 2 possibilities to make both the identities equal. We can either increase the right side or decrease the value of left side. For that we can consume less of good Y, so that the marginal utility of the commodity Y increases. And reduce the consumption till the point both the identities are equal. Or, we can increase the consumption of commodity X, so that the marginal utility could be decreased and this should be done till left side is equal to right side.

*NOTE*- Marginal utility decreases with increase in the consumption of commodity and increases with the reduction in the consumption. This is due to the applicability of "Law of diminishing marginal utility".