Consumer’s Equilibrium:

Utilility Maximisation with Indifference

Curve and Budget line
 Indifference Curve:
Combination Units of X Units of Y Utils MRS

A 1 30 Uo -

B 2 24 Uo

C 3 19 Uo

D 4 15 Uo

E 5 12 Uo

F 6 10 Uo
Terms:
• Total Utility:TU: Refers to the total satisfaction
received from consuming different units of a
product.
• Marginal utility: MU=( TUx/Qx)
• i.e. The change in TU due to the consumption
of one more unit of the commodity.
• Marginal rate of substitution: MRS: Refers to
the rate at which the consumer would be able
to substitute one commodity with another
without affecting his total satisfaction.
 Budget line:
• M=Px Qx +Py Qy
• M=total budget (say ₹ 1000)
• Px=price per unit of commodity X (say ₹ 10)
• Py=price per unit of commodity Y (say ₹ 50)
• Qx and Qy are units of Commodities X and Y
 So the consumer’s equilibrium conditions
are:
• 1.( Mux/Px) = (Muy/Py) = (Muz/Pz) .........
i.e. The ratio of marginal utility to the per unit
price of all the commodity should be equal.

• 2. PxQx + PyQy = PzQz ....... =M

i.e. The Total expenditure on all the commodities
should exhaust the total budget.
Q5.Arwin has income of $37 and the price per unit of goods
X, Y and Z he is consuming are $5, $1 and $4 respectively.

• The amount of Total utility he receives from consuming

these commodities is given below.
Find the combination of X, Y and Z which will
maximise his utility or satisfaction?
Quantity Product X Product Y Product Z
consumed
TU TU TU

1 21 7 16

2 41 13 30

3 59 18 42

4 74 22 50

5 85 25 55

6 91 27 58

7 91 28 60
Quantity Product X Product Y Product Z
consumed

TU MUx MUx/Px TU MUy MUy/Py TU MUz MUz/Pz

1 21 7 16

2 41 13 30

3 59 18 42

4 74 22 50

5 85 25 55

6 91 27 58

7 91 28 60
 Solution
Quantity Product X Product Y Product Z

Total Marginal Total Marginal Total Marginal

Utility Utility/price Utility Utility/price Utility Utility/price

(TU) (MUx/Px) (TU) (MUy/Py) (TU) (MUz/Pz)

1 21 4.2 7 7 16 4

2 41 4 13 6 30 3.5

3 59 3.6 18 5 42 3

4 74 3 22 4 50 2

5 85 2.2 25 3 55 1.25

6 91 1.2 27 2 58 0.75

7 91 0 28 1 60 0.5
Q4.The following table illustrate Eileen’s utilities from watching first
run movies in a theatre and from renting movies from a video store.
Suppose that she has a monthly budget of $36, each movies ticket
costs $6 and each video rental costs $3.

i. Complete the tables. Does it follow Diminishing Marginal utility

law? Explain.
ii. How much of each good does Eileen consume in Equilibrium?
iii. Suppose the prices of both types of movies drop to $1 while
Eileen’s movie budget shrinks to $10, how much of each good
does she consume in equilibrium?
 TABLE
Movies in a theatre Movies from a video store

Q TU MU MU/P Q TU MU MU/P

0 0 0 0

1 200 1 250

2 290 2 295

3 370 3 335

4 440 4 370

5 500 5 400

6 550 6 425

7 590