A Review of Consumer Equilibrium

Pretzels and Sundaes

• Two Goods: The table at the right presents utility information for Duncan Thurly, a snack-hunger consumer who is purchasing two goods, Max Mulroney's Pretzel-on-a-Stick and Hot Momma Fudge Bananarama Ice Cream Sundae.

  The left half of the table summarizes the utility numbers for Duncan's pretzel consumption. The utility story for Duncan's hot fudge sundae consumption is in the right half of the table.



• Income and Prices: At the moment, Duncan has only $20 of income available for his initial choice between pretzels and hot fudge sundaes. The price per pretzel is $2 and the price of each hot fudge sundae is $4.


• The Choice: Under these circumstances, Duncan selects 4 pretzels and 3 hot fudge sundaes, spending $8 on pretzels and $12 on hot fudge sundaes.


• Consumer Equilibrium: This combination satisfies the rule of consumer equilibrium and equates the marginal utility-price ratio for each good. The marginal utility of the last pretzel is 6 utils, giving a marginal utility-price ratio of 3 utils per dollar. The marginal utility of the last hot fudge sundae is 12 utils, also resulting in a marginal utility-price ratio of 3 utils per dollar. Consumer equilibrium is achieved.


• Utility Maximization: And with consumer equilibrium, utility is maximized at a total of 84 utils. The purchase of 4 pretzels generates 36 utils of satisfaction and the consumption of 3 hot fudge sundaes adds another 48 utils. No other combination of pretzels and hot fudge sundaes that can be purchased with $20 of income generates a greater level of utility.

An Income Change

To answer this question, the original consumer equilibrium must be reevaluated. If Duncan continues to consume 3 sundaes and 4 pretzels, he spends only $20, but his new budget constraint is now $26. Duncan has $6 extra dollars to spend. Given that sundaes are $4 and pretzels are $2, why not consume one more of each? Doing so uses up the extra $6. Click the [Income Change] button in the adjoining exhibit to highlight this new option.

Pretzels and Sundaes

• All Income Spent: The combination of 5 pretzels and 4 hot fudge sundaes seems to be an appropriate choice of the two goods. With this new income, Duncan spends $10 on pretzels and $16 on hot fudge sundaes, which now exhausts the larger amount of income.


• Consumer Equilibrium: As it turns out, this new combination also satisfies the rule of consumer equilibrium and equates the marginal utility-price ratio for each good. The marginal utility of the last pretzel is 4 utils, giving a marginal utility-price ratio of 2 utils per dollar. The marginal utility of the last hot fudge sundae is 8 utils, also resulting in a marginal utility-price ratio of 2 utils per dollar. Consumer equilibrium is achieved.


• Utility Maximization: And with this new consumer equilibrium, utility is now maximized at a total of 96 utils. The purchase of 5 pretzels generates 40 utils of satisfaction and the consumption of 4 hot fudge sundaes adds another 56 utils. No other combination of pretzels and hot fudge sundaes purchased with $26 of income generates a greater level of utility.