Chapter 20, Problem 20.4LO

To determine

The consumer equilibrium and bounded rationality.

Introduction:

Marginal Utility- It is the utility derived from the consumption of one more or an additional unit of the good being consumed. It is calculated as the difference between the utility derived from the consumption of (n+1) the unit and that derived from the nth unit.

$MU=T{U}_{n+1}-T{U}_n$

Total Utility- TU above stands for the total utility. It is the aggregate satisfaction that a consumer derives from the total consumption of the good being consumed. It is the sum of the marginal utilities of the individual units consumed.

Utils- The units in which utility is measure is called a util.

Consumer equilibrium- It is the highest level of satisfaction with an affordable amount of goods and services that can be attained by a consumer at the current prices such that he exhausts his income. Thus, is an equilibrium of his ability and willingness to pay. The equilibrium can be stated as:

$\frac{M{U}_X}{P_X}=\frac{M{U}_Y}{P_Y}=\mathrm{.......}\frac{M{U}_n}{P_N}=M{U}_M$