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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.
Give Reasons
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Solution
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:
\[ MRS_{XY}=\frac{P_X}{P_Y} \]
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