UNIT 2

CONSUMER’S EQUILIBRIUM AND THEORY OF DEMAND

Utility :- utility is the want satisfying power of a commodity. It refers to the amount of
satisfaction a consumer receives from consumption of a goods or services.

There are two approaches for the measurement of utility:

1. Cardinal approach
2. Ordinal approach

Cardinal utility analysis Ordinal utility analysis

1.This is given by Alfred Marshall 1.This is given by J. R Hicks.
2.it measures utility in quantitative 2.It measures utility in qualitative order like first
order like 1,2,3,4…. etc preference, second preference, third preference
3.it is measured in absolute numbers. etc.
4.the unit of utility are called utils. 3.it is measured in ranks
4.there is no such units.

There are two types of utility:-

1. Total utility (TU)
2. Marginal utility (MU)

Total Utility :- it is defined as total satisfaction/utility a consumer derives from consumption

of a certain amount of commodity. TU is the sum total of Marginal Utility (MU)
TUn = MU1 + MU2 + MU3 + …………+ MUn
TU = Σ MU

Marginal utility : - it is an addition made to total utility by consuming an additional unit of

the commodity or it is the additional utility derived from consumption of one more unit of the
given commodity.
MUn = TUn – TU(n-1) (when units change is consecutive order , one by one)

∆𝑇𝑈
MU = (when units do not change in consecutive order)
∆𝑄

numerical example:-
Unit consumed of X TU (utils) MU
(utils)
1 10 10
2 18 8
3 24 6
4 28 4
5 30 2
6 30 0
7 28 -2

Unit 2. Consumer’s equilibrium & Theory of demand Page 1

 Diagram:-
TU MU

TU

0 units consumed 0 units consumed

MU
Relationship between TU and MU

Unit TU MU
consumed (utils) (utils) TU& MU
1 10 10 TU
2 18 8
3 24 6
4 28 4
5 30 2
6 30 0 0 Units consumed
7 28 -2 MU

1. When MU falls positively TU increases

2. When MU becomes zero, TU is maximum and constant
3. When MU becomes negative, TU decreases.
Law of Diminishing Marginal Utility (DMU)
According to law of DMU, “as a consumer consumes more and more units of a commodity,
marginal utility derived from additional units goes on falling and becomes zero and then negative.”
Assumptions:-
1. Standard unit of measurement:- unit of measurement should not be very large or very small.
For example, a cup of tea not a drop or spoon of tea.
2. Continuous consumption:- there should not be time gap between consumption of successive
unit of the commodity.
Numerical presentation of Law of DMU

Unit TU MU In the table as consumer increases the

consumed (utils) (utils) consumption, MU goes on decreasing and
1 10 10 becomes 0 at 6th unit of consumption. after
2 18 8 sixth unit MU becomes negative.
3 24 6
4 28 4
5 30 2
6 30 0
7 28 -2

Unit 2. Consumer’s equilibrium & Theory of demand Page 2

 Graphical presentation of the Law of DMU

In diagram, as unit of consumption

increases, MU decreases. MU becomes TU& MU
zero and TU maximum at OL units of TU
consumption and after OL units, MU
becomes negative and TU starts falling.

O L Units consumed
MU

CONSUMER’S EQUILIBRIUM (cardinal analysis/utility analysis)

Case I :- Consumer Equilibrium in case of a single commodity:-
Meaning :- consumer equilibrium refers to a situation where in a consumer gets maximum satisfaction from a
the purchase of commodity with his given income and he has no urge/tendency to make any change.
in single commodity model the consumer wants to purchase a single commodity.
Condition:-
𝑀𝑈𝑥
= 𝑃𝑥
𝑀𝑈𝑚
where, MUx = Marginal utility of commodity x,
MUm = Marginal Utility of money,
Px = price of the commodity and
𝑀𝑈𝑥
= 𝑀𝑈 𝑖𝑛 𝑡𝑒𝑟𝑚𝑠 𝑜𝑓 𝑚𝑜𝑛𝑒𝑦.
𝑀𝑈𝑚

i.e., MU in terms of money = price of commodity, which means that consumers satisfaction is equal to
sacrifice (price) paid for it.
Tabular example:-
The following schedule is based on the assumption that MUm = 2 and Px = 3

Unit of X MUx MUm 𝑀𝑈𝑥 Px

consumed 𝑀𝑈𝑚

1 10 2 5 3
2 8 2 4 3
3 6 2 3 3 equilibrium
4 4 2 2 3
5 2 2 1 3
6 0 2 0 3
7 -2 2 -1 3

Unit 2. Consumer’s equilibrium & Theory of demand Page 3

 In the table consumer is in equilibrium at 3rd unit of consumption. At this level of consumption the condition is
satisfied, that is, MU in terms of money is equal to Price of the commodity.
Graphical example:-

In the diagram, along the Y axis MU in terms 𝑀𝑈𝑥

&
𝑀𝑈𝑚
of money and price of the commodity are
measured and in X axis units of good x is Px
consumed. E Px
Consumer equilibrium is determined at Point
E as here Marginal utility in terms of money is
equal to price of the commodity.
𝑀𝑈𝑥
Before the point E, > 𝑃𝑥 and after the 0 Units consumed
𝑀𝑈𝑚
𝑀𝑈𝑥 𝑀𝑈𝑥
point E, < 𝑃𝑥.
𝑀𝑈𝑚 𝑀𝑈𝑚

𝑴𝑼𝒙
If 𝑴𝑼𝒎
> 𝑃𝑥 :- If marginal utility in terms of money is greater than the price of the commodity, which means
consumers satisfaction is more than the sacrifice (Px), then the consumer will purchase more of the good X till
he reaches the equilibrium.
𝑴𝑼𝒙
If 𝑴𝑼𝒎
< 𝑷𝒙 :- If marginal utility in terms of money is less than the price of the commodity, which means
consumers satisfaction is less than the sacrifice (Px), then the consumer will purchase less of the good X till he
reaches the equilibrium.

Case II :- Consumer Equilibrium in case of two commodity:-

Meaning :- consumer equilibrium refers to a situation wherein a consumer gets maximum satisfaction from a
the purchase of commodity with his given income and he has no urge/tendency to make any change.
in two commodity model the consumer purchase two commodity X and Y.
Condition:-
𝑀𝑈𝑥 𝑀𝑈𝑥
for commodity X, = 𝑃𝑥 or = 𝑀𝑈𝑚
𝑀𝑈𝑚 𝑃𝑥

𝑀𝑈𝑦 𝑀𝑈𝑦
for commodity Y, = 𝑃𝑦 or = 𝑀𝑈𝑚
𝑀𝑈𝑚 𝑃𝑦

𝑀𝑈𝑥 𝑀𝑈𝑦
for both the commodity, = = 𝑀𝑈𝑚
𝑃𝑥 𝑃𝑦
𝑀𝑈𝑥 𝑀𝑈𝑦
or , =
𝑃𝑥 𝑃𝑦

Unit 2. Consumer’s equilibrium & Theory of demand Page 4

Tabular example:-
The following schedule is based on the assumption that
1. Price of good X (Px) = Rs. 2/- , and price of good Y = Rs. 2/-
2. money income of a consumer is Rs.10/-

Unit MUx MUy 𝑀𝑈𝑥 𝑀𝑈𝑦

consumed 𝑃𝑥 𝑃𝑦

1 10 8 5 4
2 8 6 4 3
3 6 4 3 2
4 4 2 2 1
5 2 0 1 0
6 0 -2 0 -1

𝑀𝑈𝑥 𝑀𝑈𝑦
in the table the condition = are satisfied in the following compositions:
𝑃𝑥 𝑃𝑦
a. 2 unit of good X and 1 units of good Y
b. 3 unit of good X and 2 units of good Y
c. 4 unit of good X and 3 units of good Y
d. 5 unit of good X and 4 units of good Y
with the money income = Rs.10/-, he buy 3 units of good X and 2 units of good Y, (where 3x2 + 2
x2 = 10) which gives him maximum satisfaction within his given income.
Graphical example:-

In the diagram consumer is in

equilibrium at point E, where the 𝑀𝑈𝑥 𝑀𝑈𝑥 𝑀𝑈𝑦
𝑀𝑈𝑦
𝑀𝑈𝑥
condition is satisfied that is both 𝑃𝑥 𝑃𝑥 𝑃𝑥 𝑃𝑦
𝑃𝑦
𝑀𝑈𝑦
and are intersects each other.
𝑃𝑦
𝑀𝑈𝑥 𝑀𝑈𝑦 E
Before this point > 𝑎𝑛𝑑
𝑃𝑥 𝑃𝑦
𝑀𝑈𝑥 𝑀𝑈𝑦
After this point <
𝑃𝑥 𝑃𝑦

0 0

units of X consumed
units of Y consumed

𝑴𝑼𝒙 𝑴𝑼𝒚
If 𝑷𝒙
>
𝑷𝒚
:- the consumer gets more marginal utility from the rupee spent on X as compared to Y. Thus he prefer to
buy more of X and less of Y. Law of DMU operates. It will cause fall in MUx and rise in MUy. the consumer continue to
𝑀𝑈𝑥
buy more of X till is equal to 𝑀𝑈𝑦.
𝑃𝑥 𝑃𝑦

Unit 2. Consumer’s equilibrium & Theory of demand Page 5

 𝑴𝑼𝒙 𝑴𝑼𝒚
If 𝑷𝒙
< the consumer gets more marginal utility from the rupee spent on Y as compared to X.
𝑷𝒚
:-
Thus he prefer to buy more of Y and less of X. Law of DMU operates. It will cause fall in MUy and
rise in MUx. The consumer continue to buy more of Y till 𝑀𝑈𝑥
𝑃𝑥
is equal to 𝑀𝑈𝑦
𝑃𝑦
.

Previous year CBSE questions

Q1. A consumer consumes only two goods. Marginal utility of X and Y are 4 and 3 respectively. Price of X
and price of Y is Rs. 3 per unit. Is consumer in equilibrium? What will be further reaction of the
consumer? Give reason.
for equilibrium 𝑴𝑼𝒙
𝑷𝒙
=
𝑴𝑼𝒚
𝑷𝒚
𝑴𝑼𝒙 𝑴𝑼𝒚
here = 4/3 and = 3/3
𝑷𝒙 𝑷𝒚
𝑴𝑼𝒙 𝑴𝑼𝒚
that is, >
𝑷𝒙 𝑷𝒚

So consumer is not in equilibrium.

𝑴𝑼𝒙 𝑴𝑼𝒚
IF > :- The consumer gets more marginal utility from the rupee spent on X as compared to Y. Thus he prefer to
𝑷𝒙 𝑷𝒚
buy more of X and less of Y. Law of DMU operates. It will cause fall in MUx and rise in MUy. The consumer continue
𝑀𝑈𝑥
to buy more of X till is equal to 𝑀𝑈𝑦.
𝑃𝑥 𝑃𝑦

Q2. A consumer consume only 2 goods X and Y. The marginal utility of X and Y is 3. Price of X and Y are
Rs.2 and Rs.1 respectively. Is consumer in equilibrium? what will be further reaction of the
consumer? give reason.
for equilibrium 𝑴𝑼𝒙
𝑷𝒙
=
𝑴𝑼𝒚
𝑷𝒚
𝑴𝑼𝒙 𝑴𝑼𝒚
here = 3/2 and = 3/1
𝑷𝒙 𝑷𝒚
𝑴𝑼𝒙 𝑴𝑼𝒚
that is, <
𝑷𝒙 𝑷𝒚

So consumer is not in equilibrium.

𝑴𝑼𝒙 𝑴𝑼𝒚
If 𝑷𝒙
< the consumer gets more marginal utility from the rupee spent on Y as compared to X.
𝑷𝒚
:-
Thus he prefer to buy more of Y and less of X. Law of DMU operates. It will cause fall in MUy and
rise in MUx. The consumer continue to buy more of Y till 𝑀𝑈𝑥
𝑃𝑥
is equal to 𝑀𝑈𝑦
𝑃𝑦
.

Q3. A consumer is in equilibrium consuming good X and good Y, with his given prices Px and Py. (a) what
will happen if 𝑴𝑼𝒙
𝑷𝒙
>
𝑴𝑼𝒚
𝑷𝒚
? (b) What will happen if Py falls.

(a) 𝑴𝑼𝒙
𝑷𝒙
>
𝑴𝑼𝒚
𝑷𝒚
:- The consumer gets more marginal utility from the rupee spent on X as compared to Y. Thus
he prefer to buy more of X and less of Y. Law of DMU operates. It will cause fall in MUx and rise in MUy. The
𝑀𝑈𝑥
consumer continue to buy more of X till is equal to 𝑀𝑈𝑦. 𝑃𝑥 𝑃𝑦
𝑴𝑼𝒙 𝑴𝑼𝒚
(b) in equilibrium, 𝑷𝒙
=
𝑷𝒚
.
𝑴𝑼𝒙 𝑴𝑼𝒚
If Py falls , then the consumer gets more marginal utility from the rupee spent on Y as
𝑷𝒙
<
𝑷𝒚
:-
compared to X. Thus he prefer to buy more of Y and less of X. Law of DMU operates. It will cause
fall in MUy and rise in MUx. The consumer continue to buy more of Y till 𝑀𝑈𝑥
𝑃𝑥
is equal to 𝑀𝑈𝑦
𝑃𝑦
.

Unit 2. Consumer’s equilibrium & Theory of demand Page 6

 ORDINAL UTILITY ANALYSIS (IC ANALYSIS)
Consumption Bundle:- It is the combination of the quantities of two goods. Example: (x , y) denotes a
bundle having x unit of good 1 and y units of good 2. Similarly bundle (20,10) means 20 units of good
X and 10 units of good Y.
Budget set:- it refers to all consumption bundles that the consumer can buy using his money income at the
prevailing market price. Budget set depends on two factors:-
• Consumer’s money income
• Price of good X and price of good Y
At the given prices, budget set includes all those consumption bundles which cost less than or equal
to his income.
i.e., PxQx + PyQy ≤ M
where Px , Py = price of good X and price of good Y
Qx, Qy = quantity of good X and quantity of good Y
M= money income
for example: if money income in Rs.10/- price of Good X (Px) = 2/- and price of good Y (Py) = 1/-
then Budget set are (0,10), (1,0), (1,5), (2,4), (3,4), (2,1), (5,0) etc
Budget line (price Line):- A budget line represent the different bundles that the consumer can purchase
spending his entire money income at given prices.
here , PxQx + PyQy = M
Tabular example:
Following table is based on the assumption that
Px = 4/- per unit , Py = 2/- per unit and M =20/-
Combinations Quantity of X (Qx) Quantity of Y (Qy) Expenditure = income
A 0 10 4 x 0 + 2 x 10 = 20
B 1 8 4 x 1 + 2 x 8 = 20
C 2 6 4 x 2 + 2 x 6 = 20
D 3 4 4 x 3+ 2 x 4 = 20
E 4 2 4 x 4 + 2 x 2 = 20
F 5 0 4 x 5 + 2 x 0 = 20
Graphical example:-

• BL is the budget line, which shows that good Y

entire income is spent on good X and B Q
good Y.
• All the bundles inside (to the left of) the M P
BL are attainable. (ex: point M & N)
• All the bundles (combinations) outside N
(to the right of) the BL are non- 0
attainable. (ex: point Q & P) g L good X

Unit 2. Consumer’s equilibrium & Theory of demand Page 7

Budget constraint :- The budget constraint refers to a situation when expenditure on two goods by the
consumer should not be more than the income of the consumer. In other words budget constraint
show the limit on the bundles that the consumer can afford.
PxQx + PyQy ≤ M
Features of budget line:-
1. Budget line is a straight line because its slope is constant.
2. Slope of budget line is equal to price ratio of two good X and Y
𝑃𝑥
Slope of budget line = (-)
𝑃𝑦
3. It is a negatively sloped curve or a downward sloping curve. It implies that increase in the
consumption of one commodity is followed by decrease in the consumption of other commodity
because income is constant.
𝑀 𝑀
4. the horizontal intercept is if entire income is spent on good X and the vertical intercept is if
𝑃𝑥 𝑃𝑦
entire income is spent on good Y.

Slope of Budget line :-

• The slope of Budget line is that rate at which the consumer is able to substitute one commodity
for the other in the market.
• Slope of budget line is equal to the ratio of prices of two goods .(price ratio/Market rate of
Exchange MRE)
𝑃𝑥
• Slope of budget line =
𝑃𝑦
• for example if Px = 4/- and Py = 2/- then slope of budget line is
4
= 2 . It means that 2 unit of good Y must be given to gain 1 unit of X.
2

Budget line equation

PxQx + PyQy = M
for example : if price of good X is Rs. 5/- and Y is Rs.4/- and money income is 50 then
budget equation is 5Qx + 4Qy = 50

Unit 2. Consumer’s equilibrium & Theory of demand Page 8

 CHANGES IN BUDGET LINE
Case 1: when income changes: Assuming that price of both the goods remaining unchanged ,
budget line will change with change in income of the consumer in the following ways:

a) increase in income b) decrease in income

An increase in income of the consumer An decrease in income of the consumer
causes a parallel rightward shift of the causes a parallel leftward shift of the
budget line from BL to B1L1. it means that a budget line from BL to B2L2. it means
consumer now can purchase more quantity that a consumer now can purchase more
of both the goods. quantity of both the goods
good Y
Y
B1
B
B
B2

0 L L1 good X 0 L2 L good X
Case II : - When Price changes:- Assuming that income of the consumer remaining unchanged , budget line
will change with change in price of the goods in the following ways:
a) when price of Good X changes
(i) increase in price of X (ii) decrease in price of X
An increase in price of good X causes a left An decrease in price of good X causes a right
ward rotation in the budget line as shown in ward rotation in the budget line as shown in
the diagram from BL to BL1. It means that a the diagram from BL to BL2. It means that a
consumer now can purchase less of good X consumer now can purchase more of good X
without any change in good Y. without any change in good Y.

Y
Good Y

B
B

0 L1 L good X 0 L L2 good X

Unit 2. Consumer’s equilibrium & Theory of demand Page 9

 b) When price of the Good Y changes
(i) increase in price of Y (ii) decrease in the price of Y
An increase in price of good Y causes a left An decrease in price of good Y causes a right
ward rotation in the budget line as shown in ward rotation in the budget line as shown in
the diagram from BL to B1L. It means that a the diagram from BL to B2L. It means that a
consumer now can purchase less of good Y consumer now can purchase more of good Y
without any change in good X without any change in good X.

Y
Good Y

B2
B
B
B1

0 L good X 0 L good X

c) When price of the both the goods changes

(i) decrease in price of both goods (ii) increase in price of both goods
An decrease in price of both goods causes a An increase in price of both goods causes
rightward shift of the budget line from BL to a leftward shift of the budget line from BL
B1L1. it means that a consumer now can to B2L2. it means that a consumer now
purchase more quantity of both the goods. can purchase more quantity of both the
goods

B1 Y

B B

B2

0 L L1 good X 0 L2 L good X

Unit 2. Consumer’s equilibrium & Theory of demand Page 10

 d) when price of one good increases and other decreases.

(i) price of X increases &Y decreases (ii) price of X decreases &Y increases
If price of good X increases and price of If price of good X decreases and price of
good y decreases then the budget line good y increases then the budget line
changes from BL to B1L1. It means that a changes from BL to B2L2. It means that a
consumer now can purchase less of good X consumer now can purchase more of good
and more of good Y. X and less of good Y.

B1 Y
B
B
B2

0 L1 L good X 0 L L2 good X

Indifference Schedule:-

An indifference Schedule is a schedule of various bundles of goods that gives equal level of
satisfaction to the consumer. Hence, a consumer becomes indifferent between them.

Bundles Good X Good Y

A 1 12
B 2 8
C 3 5
D 4 3
E 5 2
Indifference Curve (IC):-

Indifference curve is the locus of points which representing such bundle of two goods, among which
the consumer is indifferent.

The graphical presentation of indifference

schedule gives indifference curve. This curve Good Y
represents those combinations of goods which
give equal satisfaction to the consumer. All
these bundles give him equal satisfaction that
is why he is indifferent between them.
IC
0 Good X

Unit 2. Consumer’s equilibrium & Theory of demand Page 11

Marginal Rate of Substitution (MRS) / Slope of Indifference Curve:-

MRS means the rate at which a consumer is willing to sacrifice good Y to gain an additional unit of
good X, so as to maintain the same level of satisfaction.
𝑢𝑛𝑖𝑡𝑠 𝑜𝑓 𝑔𝑜𝑜𝑑 𝑋 𝑡ℎ𝑒 𝑐𝑜𝑛𝑠𝑢𝑚𝑒𝑟 𝑖𝑠 𝑤𝑖𝑙𝑙𝑖𝑛𝑔 𝑡𝑜 𝑠𝑎𝑐𝑟𝑖𝑓𝑖𝑐𝑒
MRS = 𝑢𝑛𝑖𝑡𝑠 𝑜𝑓 𝑔𝑜𝑜𝑑 𝑋 𝑔𝑎𝑖𝑛𝑒𝑑

𝑢𝑛𝑖𝑡𝑠 𝑠𝑎𝑐𝑟𝑖𝑓𝑖𝑒𝑑 𝐿𝑜𝑠𝑠 ∆𝑌

MRS = 𝑢𝑛𝑖𝑡𝑠 𝑔𝑎𝑖𝑛𝑒𝑑
= 𝑔𝑎𝑖𝑛
= ∆𝑋

Bundles Good X Good Y MRS

A 1 12 ---
B 2 8 4:1 or 4
C 3 5 3:1 or 3
D 4 3 2:1 or 2
E 5 2 1:1 or 1
Properties of Indifference Curve

1. An indifference curve slopes downwards.:- It is because, if the consumer wants to have more units of
one good, he will have to reduce the number of units of another good in order to maintain the same
level of satisfaction.
2. An indifference curve is convex to the point of origin:- It is because of diminishing MRS. In order to
gain an additional unit of good X, the consumer is prepared to give up less and less unit of good Y than
before.
3. Every Indifference curve to the right represents higher level of satisfaction:- when there is a set of
indifference curves called indifference map, higher indifference curve represents higher level of
satisfaction or right side IC gives more satisfaction as compared to IC lying towards left.

Here a < b < c < d. that is

satisfaction from the bundles on Good Y
IC1 < IC2 < IC3< IC4 d
c
b IC4
a IC3
IC2
IC1

0 G ood X

4. Indifference curves do not cut each other. It is because, if they cut each other, the result will be a
paradox.

On IC2, there are two points a and b

So a = b Good Y a
On IC1, there are two points a and c IC2
b
So a = c c
If a=b and a=c, then b=c, but b ≠c, IC1
as b>c, because b lies on higher IC. 0

Unit 2. Consumer’s equilibrium & Theory of demand Page 12

 CONSUMER’S EQUILIBRIUM (Indifferent Curve Analysis)

Meaning :- consumer equilibrium refers to a situation where in a consumer gets maximum satisfaction from a
the purchase of commodity with his given income and he has no urge/tendency to make any change.
Condition:-
(i) Price Line should be tangent to the Indifference Curve
i.e., Slope of IC = Slope of Budget line
𝑃𝑥
i.e., MRS =
𝑃𝑦
i.e., rate at which the consumer is willing to sacrifice should be equal to what the
consumer has to sacrifice to obtain one more unit of other good.

(ii) Indifference Curve should be convex to origin

i.e., MRS should be diminishing.
Diagram
In the diagram point E is the
point of equilibrium. It
satisfies all the condition, that
is, Budget Line is tangent to IC
and IC is convex to origin.
At point A and S Budget Line
intersect IC1, but they are nor
tangent. Also A and S lies on
lower IC, hence not desirable.
Point G and H are desirable but
not attainable as they are to the
right of Budget line.
Hence point E is the optimal
choice.

If MRS > Price Ratio (Px/Py) :-

It means to obtain one more unit of Good X, the consumer is willing to sacrifice more
units of Y than what the market requires. In other words, he is willing to pay a price which is
higher than the market price. It induces the consumer to buy more of X and less of Y, MRS
begins to fall till it becomes equal to Price ratio (hence consumer equilibrium).
If MRS < Price Ratio (Px/Py) :-
It means to obtain one more unit of Good X, the consumer is willing to sacrifice lesser
units of Y than what the market requires. In other words, he is willing to pay a price which is
lower than the market price. It induces the consumer to buys less of X and more of Y, MRS
begins to increase till it becomes equal to Price ratio (hence consumer equilibrium).

Unit 2. Consumer’s equilibrium & Theory of demand Page 13

 Previous year CBSE questions
Q1. A consumer consumes only two goods X and Y. both price at Rs.2/- per unit. If the consumer
choose a combination of the two goods with Marginal Rate of Substitution equal to 2, is the
consumer in equilibrium? Why or why not? What will be a rational consumer do in this
situation? Explain.
Q2. (a) What is the budget line? What does the point on it indicate in term of prices?
(b) A consumer consume X and Y, her money income is Rs.24/- and the price of X and Y are
Rs.4/- and 2/- respectively. Answer the following questions.
(i) Can the consumer afford a bundle 4x and 5y?
(ii) What will be MRSxy, when the consumer is in equilibrium? Explain.
Q3. A consumer consume two goods. His income is Rs.50. Px = Rs.8/- each and Py = Rs.5/- can he
buy:
(i) 4 units of X and 3 units of Y
(ii) 5 units of X and 2 units of Y
(iii) Find MRSxy at the points of equilibrium.
Q4. A consumer wants to buy two goods. The price of two goods are Rs.4/- and Rs.5/- respectively.
The consumer income is Rs.20/-.
(i) Write down the equation of budget line.
(ii) How much of good 1 can the consumer consume if he spent his entire income on
that good.
(iii) How much of good 2 can the consumer consume if he spent his entire income on
that good.
(iv) What is the slope of the budget line?
Q5. A consumer has total money income of 500/- to be spent on two good X and Y with price of
Rs.50/- and Rs.10/- per unit respectively. On the basis of given information answer the
following question.
a. Give the equation of the Budget Line for the consumer.
b. What is the value of slope of the budget line/
c. How many units can be consumer buy if he is to spent all his money income on good X.
d. How does the budget line change if there is a 50% fall in price of good Y?
Q6. Given that income of a consumer is Rs.140/-, Price of X = Rs.10/- per unit and price of Y = Rs.20/-
unit. Find consumer equilibrium.

Quantity 1 2 3 4 5 6 7 8
MUx/Px 11 10 9 8 7 6 5 4
MUy/Py 18 16 15 13 12 10 9 7

Unit 2. Consumer’s equilibrium & Theory of demand Page 14

 2 unit of X and 6 unit of Y 2x10+6x20 =140
3 units of X and 7 units of Y 3x10+7x20 =170 >140
5 units of X and 8 units of Y 5x10+ 8x20 =210 >140
consumer will be in equilibrium when he purchase 2 unit of X AND 6 unit of Y

Unit 2. Consumer’s equilibrium & Theory of demand Page 15