Consumer Equilibriu1

Consumer Equilibriu1 - Consumer Equilibrium, Changes in...

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Unformatted text preview: Consumer Equilibrium, Changes in Prices The consumer's choice of how much to consume of various goods depends on the prices of those goods. If prices change, the consumer's equilibrium choice will also change. To see how, consider again the example considered above where the consumer must decide how much to consume of goods 1 and 2. Suppose that the price of good 1 increases from $2 per unit to $3 per unit, while the price of good 2 remains unchanged at $1 per unit. Everything else remains the same; the consumer's budget is still $5, and the marginal utility that the consumer receives from each additional unit of goods 1 and 2 is unchanged. However, the ratio of the marginal utility of good 1 to the price of good 1 is now changed, due to the increase in the price of good 1. The new situation is reported in Table 1 . The increase in the price of good 1 to $3 lowers the marginal utility per dollar spent on good 1...
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