Question

A consumer consumes only two goods X and Y, both priced at Rs 2 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? Why or why not? What will a rational consumer do in this situation? Explain.

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 = 2/2 = 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