Theory question 105
Theory of Demand(a) What is the equilibrium of a consumer?
(b) Explain how a consumer attains equilibrium in spending his income.
Show the model answer
Model answer
(a) Consumer equilibrium is the position where a consumer, with a given income and given prices, gets the maximum total satisfaction and has no reason to change the way he spends his income.
(b) He spends his income so that the marginal utility per naira is the same for all goods: MUA/PA = MUB/PB = … and all his income is spent. If MU per naira is higher for one good, he buys more of it and less of the others until they are equal (equi-marginal principle). For one good, he buys until MU = price.
Explanation
State the equi-marginal condition and the budget constraint.