Concept introduction:
Budget Line: It is defined as the combination of all goods that a consumer can buy exhausting his all income. Formula for the budget line is:
Here,
- is the quantity of good X.
- is the quantity of good Y.
- is the total income.
- is the price of good X.
- is the price of good Y.
- Or
- is the marginal utility.
- is the total utility.
- X is the quantity of any good.
- N is the number of goods.
- is the marginal utility per dollar.
- is the price of good X.
- is the marginal utility of good X.
- is the marginal utility of good Y.
- is the price of good X.
- is the price of good Y.
Here,
Marginal Utility per dollar: It is the ratio of marginal utility to that of the price of a good. The formula to calculate the marginal utility per dollar is:
Here,
Maximizing utility in the case of two goods: It states that the equilibrium level of consumption of two goods for a consumer is achieved when the marginal utility per dollar of the two goods are equal. This means that the following conditions must be fulfilled:
Here,
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