Price of coffee rises , while price of tea remains constant. How would the consumer react to this situation to restore his equilibrium? Use law of equi-marginal utility.?

Question

Answer

Consumer Reaction to Rise in Coffee Prices

Law of Equi-Marginal Utility

The law of equi-marginal utility states that a consumer will allocate his income in such a way that the marginal utility derived from the last unit of money spent on each product is the same. In other words, the consumer will try to maximize his total satisfaction by spending his limited income on different products in such a way that the marginal utility per unit of money spent is equal for all products.

Consumer Reaction

When the price of coffee rises while the price of tea remains constant, the consumer will try to restore his equilibrium by making the following adjustments:

Substitution: The consumer may decide to substitute tea for coffee to maintain his overall satisfaction. As the price of coffee rises, its marginal utility will decrease, making the marginal utility per unit of money spent on tea comparatively higher. Therefore, the consumer will shift his consumption towards tea.

Reduction in Consumption: The consumer may decide to reduce his overall consumption of both coffee and tea to maintain his satisfaction level. This is because, with the rise in the price of coffee, the total utility derived from consuming both products will decrease, making it less attractive to the consumer.

Income Adjustment: The consumer may adjust his income allocation towards tea to maintain his overall satisfaction level. If the rise in coffee prices is significant enough, the consumer may decide to allocate more income towards tea to maintain his overall utility level.

Conclusion

The law of equi-marginal utility suggests that the consumer will try to maximize his satisfaction level by making adjustments in his consumption pattern when faced with a rise in coffee prices. The consumer may substitute tea for coffee, reduce his overall consumption, or adjust his income allocation towards tea to maintain his satisfaction level.

Answer

He will consume more units of tea

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