Question

A consumer consumes only two goods, each priced at Rupee one per unit. If the consumer chooses a combination of the two goods with Marginal Rate of Substitution equal to 2, is the consumer in equilibrium? Give reasons. Explain what will a rational consumer do in this situation.

Answer 1

The consumer reaches equilibrium point only when the following condition is satisfied

MRS = `P_x/P_y`

Given that
MRS = 2

`P_x/P_y = 1/1/ = 1`

As MRS is greater than the price ratio, the rational consumer would try to satisfy the condition by increasing the consumption of Good-X and forego the consumption of Good-Y.