Q13 of 15 Page 2

A consumer consumes only two goods X and Y and is in equilibrium. Show that when the price of good X rises the consumer buys less of good X. Use utility analysis.

As per utility analysis, a consumer remains in a condition of equilibrium when:

MUx / Px = MUy / Py = MUm


Given that price of good X (Px) increases, then:


MUx / Px < MUy / Py


Since per unit price MUx is lower in comparison to per unit price MUy, the consumer tends to buy more of Y and lesser of X.


This, thus, exhibits that when Px increases, demand for X tends to drop.


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