Question

A consumer consumes only two goods X and Y. The Marginal Rate of Substitution is 1. Prices of X and Y are ₹ 3 and ₹ 4 per unit respectively. Is the consumer in equilibrium? What will be further reaction of the consumer? Give reason.

Answer 1

No, the consumer is not in equilibrium.

Given:

\(MRS_{XY}=1\)

\(P_X=  ₹3\)

\(P_Y=  ₹4\)

Condition of Consumer’s Equilibrium:

\[ MRS_{XY}=\frac{P_X}{P_Y} \]

\[ \frac{P_X}{P_Y}=\frac{3}{4}=0.75 \]

\[ MRS_{XY}>\frac{P_X}{P_Y} \]

\[ 1>0.75 \]

The consumer will buy more of Good X and less of Good Y until:

\[ MRS_{XY}=\frac{P_X}{P_Y} \]