Reaction of the Consumer to a Fall in Price of Good X

When the price of good X falls, it has an impact on the consumer's equilibrium and leads to a change in their consumption pattern. To understand the reaction of the consumer, we can analyze the situation using utility analysis.

1. Consumer Equilibrium:
Before the price change, the consumer was in equilibrium, where the marginal utility per unit of money spent on both goods X and Y was equal. This can be represented as:

MUx/Px = MUy/Py

Where MUx and MUy are the marginal utilities derived from consuming goods X and Y respectively, and Px and Py are the prices of goods X and Y.

2. Substitution Effect:
Due to the fall in the price of good X, its relative price compared to good Y decreases. This creates a substitution effect, which means that the consumer will now find good X relatively cheaper compared to good Y. As a result:

- The consumer will be more inclined to substitute good X for good Y.
- The consumer's marginal utility from consuming an additional unit of good X will increase.
- The consumer's marginal utility from consuming good Y may decrease or remain the same.

3. Income Effect:
When the price of good X falls, the consumer's purchasing power increases. This is known as the income effect. As a result:

- The consumer's real income increases, allowing them to buy more of both goods X and Y.
- The consumer's consumption of both goods may increase as a result of the income effect.

4. New Equilibrium:
The combined impact of the substitution and income effects leads to a new equilibrium. The consumer will adjust their consumption pattern to maximize their utility based on the new relative prices and increased purchasing power.

- The consumer will consume more of good X due to the substitution effect and the increased purchasing power.
- The consumer may consume more of good Y, less of it, or the same amount depending on the relative changes in prices and preferences.

Summary:
In summary, when the price of good X falls, the consumer reacts by adjusting their consumption pattern. The substitution effect leads to an increased consumption of good X, while the income effect allows the consumer to buy more of both goods. The combined impact of these effects leads to a new equilibrium where the consumer maximizes their utility based on the new relative prices and increased purchasing power.