Answer to Question #219641 in Microeconomics for aakash

Question

Describe the equilibrium condition of a consumer who consumes Kenkey and fish when faced with a given income and relative prices of the goods.

Starting from equilibrium,how would the consumer respond to:

i.Arise in the price of kenkey?

ii.A fall in the price of fish?

Answer 1

Solution:

The equilibrium conditions of a consumer who consumes Kenkey and fish when faced with a given income and relative prices of the goods are as follows:

1.). The marginal utility per dollar must be the same for both commodities.

2.). The marginal utility decreases when consumption increases.

The consumer will attain a stable equilibrium when he is able to consume the most preferred product bundle which gives him the highest utility.

 

i.). When the price of kenkey rises, the consumer will respond by purchasing more fish than kenkey since the price of fish will remain constant while the price of kenkey will be more expensive. This is due to substitution and income effects.

 

ii.). A fall in the price of fish will make the consumer respond by purchasing more fish than kenkey since the price of fish will be more affordable and hence the consumer will be able to purchase more of it and less kenkey due to substitution and income effect.