Principles of Microeconomics / Unit 5 MIC 0408 worked example, 60 to 90 seconds
Is the Consumer at Equilibrium?
The idea
Given the marginal utility and price of each good at a consumer's current bundle, test the rule directly. Compute marginal utility per dollar for each good. If they are equal, the consumer is at equilibrium and should change nothing. If they differ, the consumer should buy more of the good with the higher ratio and less of the other; as that happens the higher ratio falls and the lower one rises, and the process stops when they meet.
In practice
Worked example: at the current bundle, pizza has a marginal utility of thirty at ten dollars a pie, three per dollar, and salad a marginal utility of eight at two dollars, four per dollar. The ratios differ, so the consumer is not at equilibrium and should buy more salad and less pizza. After the shift, pizza's marginal utility rises to thirty-six, still three point six per dollar, and salad's falls to seven point two, also three point six: equilibrium.
Where people slip
The direction is toward the higher ratio, not the higher marginal utility; pizza had the larger marginal utility and was still the good to cut. And the test says nothing about which good the consumer likes more. It says only where the next dollar does the most good.
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