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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This note was uploaded on 11/26/2011 for the course ECON MICRO ec 201 taught by Professor - during the Fall '10 term at Montgomery.

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

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