Question

A consumer consumes only two goods X and Y. Marginal rate of substitution is 3 and per unit prices of X and Y is Rs 4 and Rs 2 respectively. Is the consumer in equilibrium? What will be the further reaction of the consumer? Give reasons

Answer 1

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

`MRS=P_x/P_y`

Given that

MRS = 3

`P_x/P_y=4/2=2`

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.