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Variation in the price

# Variation in the price - equilibrium position has been...

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Variation in the price: The equimarginal or equiproportional rule helps to establish equilibrium for a consumer- maximizing utility. Such an equilibrium holds good only under the given market conditions . If the price of one of the goods alters the consumer will have to make a readjustment and change the combination. Let us assume that the price of good Y remains the same (Py = \$2) as before, but the price of good X rises (from \$4 to \$6). The consumer will have to readjust the equilibrium. Units of good X Mu of X Mu x /P x (P x = \$6) Units of good Y Mu of Y Mu y /P y (P y = \$2) 1 48 8 1 18 9 2 36 6 2 16 8 3 24 4 3 12 6 4 12 2 4 6 3 (Equimarginal utility = 82, Total budget = \$10) With the rise in the price of good X and the price of good Y remaining constant a new

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Unformatted text preview: equilibrium position has been established. In this equilibrium position, the consumer reduces the consumption of good X, which has become ’dearer’. Instead of 2 units, only 1 unit of X is purchased and \$6 are spent on good X. The remaining \$4 are now spent on purchasing two units of good Y. Once again the Mu/P ratio for the two goods has been equated with its value ’8’ for the new combination. The consumer who is continually maximizing his utility keeps on making such readjustments whenever the market price of goods changes....
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Variation in the price - equilibrium position has been...

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