If we rearrange the terms in Equation 6-1 , we can gain additional
insight into consumer behaviour.
The right side of this equation is the relative price of the two products. It
is determined by the market and is beyond Alison’s control. She reacts to
these market prices but is powerless to change them. The left side is the
relative ability of the two products to add to Alison’s utility. This is within
her control because in determining the quantities of different products to
buy, she also determines their marginal utilities.
If the two sides of Equation 6-2 are not equal, Alison can increase her
total utility by rearranging her purchases of X and Y. Suppose that the
price of X is $4 and the price of Y is $2. The right-hand side of Equation
2 is then Remember that Alison can do nothing to
change the right-hand side of this equation—the prices are determined in
the market and are beyond her control. Suppose also that Alison is
currently purchasing X and Y such that the marginal utility for X is 12 and
the marginal utility for Y is 4. The left-hand side of Equation 6-2 is then
In this case Alison can
increase her total utility by increasing her purchases of X (which have a
high MU) and reducing her purchases of Y (which have a low MU) until
the ratio is equal to 2, the same as the ratio of the prices. At
MMUUX =
YpX
PY(6-2)
pX/pY= 4 / 2 =2.MUX/MUY= 12 / 4 =3. MUX/MUY >pX/pY.
MUX/MUY