If \(\frac{MUx }{ Px}\) > \(\frac{ MUy}{Py }\), how will a consumer react?
Answer & explanation
Correct answer: option 3
The correct answer is option 3: Both a and b
If \(\frac{MUx }{ Px}\) > \(\frac{ MUy}{Py }\), it means that the marginal utility per unit is higher for good X than for good Y.
Consumer Reaction:
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Decrease consumption of good Y: Since the marginal utility per unit for good Y is lower compared to good X, the consumer will find it less valuable relative to good X and thus will likely reduce consumption of good Y till the point both the identities are equal.
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Increase consumption of good X: Conversely, because good X provides more marginal utility per unit , the consumer will increase consumption of good 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".