A rational consumer is consuming only two goods, Good X and Good Y with < 4 and < 5 as their respective prices. Her total money income is < 40. Answer the following questions, based on the given information :

(a) State the consumer’s budget line equation.

(b) What would be the slope of the budget line?

a) Price of Good X is RS 4

Price of Good Y is RS 5

Total income is Rs 40.

The budget line equation is :

Price of Good X * X + Price of Good Y * Y = Total income

4X + 5Y = 40

b) Slope of budget line = Px/Py

Slope of budget line= ⅘

OR

If a rational consumer is consuming only two Goods X and Y, state her

likely behavior to attain consumer’s equilibrium if she faces a situation

Where

The main condition of attaining consumer’s equilibrium is the marginal utility of the last rupee spends on last good is the same.

● This means MUx/Px = MUy/Py.

● But, in this case, MUx/Px < MUy/Py.

● The marginal utility of the last rupee spends on good X is less than the marginal utility of the last rupee spends on good Y.

● To attain an equilibrium, the consumer must reduce the quantity of Good X and increase the quantity of Good Y.

● This will increase the marginal utility of Good X and reduce the marginal utility of Good Y.

● The consumer must continue to reduce the quantity of Good X and increase the quantity of Good Y till-

MUx/Px = MUy/Py