(a) What is the slope of an Indifference curve?

(b) A rational consumer is consuming only two goods, Good X and Good Y. The prices of the goods are < 20 and < 10 respectively. Her total money income is < 200. Answer the following questions, using the given information :

(i) State her Budget line equation.

(ii) State the slope of the Budget line of the consumer.

(iii) If she decides to spend her entire income on Good Y, how many units of Good Y can she buy?

OR

Discuss the law of equi-marginal utility.

a) The slope of the indifference curve is the marginal rate of substitution. (Change in Good Y/Change in Good X)

b) i) Px.Qx+Py.Qy = Total money income

20.Qx+10.Qy = 200

ii) Slope of the budget line of the consumer = Px/Py = 20/10 = 2

iii) If the entire income is spent on Good Y, this means good X quantity is zero.

20.0+10.Qy = 200

Qy = 200/10 = 20Units

OR

The law of equi marginal utility state that consumer is in equilibrium when he has attained maximum satisfaction out of his income and does not have any intention to make any change in its existing consumption.

In the case of multiple goods, the law of equi marginal utility the consumer will be in equilibrium when the ratio between the marginal utility and the price of one commodity will be equal to the ratio between the marginal utility and the price of another commodity. The consumer should incur his expenditure on different commodities in such a manner that his last rupee spent on the last unit of each commodity is equal.

This law is based on the following assumptions:

a. Rational behavior of the consumer.

b. The consumer aims at maximizing his satisfaction from his income.

c. The utility should be measurable in terms of money.

d. The marginal utility of the money is constant.

e. The price of the commodity, the price of the other related commodities, the income of the consumer is constant throughout the act of consumption.

The condition for this law are:

a. The ratio between marginal utility and price of one commodity must be equal to

the ratio between marginal utility and price of other commodities.

MUx/Px = MUy/Py

b. The total expenditure should be equal to the total income.

An explanation for this law:

a. Let us assume that there are only two commodities X and Y that a consumer want to purchase with his income.

b. According to Marshall, “If a person has a thing which can be put to several uses,

will distribute it among these uses in such a way that it has the same marginal

utility in all.”

c. The consumer will be in equilibrium when the marginal utility of the money spent on each commodity is the marginal utility of money being spent on the commodity is equal to the marginal utility of the commodity divided by the price of the commodity.

The following figure can be used to explain this law:

Let us assume that the price of the goods X and Y are Rs 4 and Rs 5 respectively. The income of the consumer is Rs 35.

a. At the 5th unit of x commodity - MUx/Px = 48/4 =12

At the 4th unit of x commodity - MUy/Py = 60/5 =12

MUx/Px = MUy/Py = 12

b. Total expenditure is equal to total income = Px * Qx + Py * Qy

= 4*5 + 5*3

= 20+15

= 35

Both the conditions are satisfied. The consumer goods purchase 5 units of x commodity and three units of Y commodity. This would maximize his satisfaction from his Limited income.