Question

A consumer consumes only two goods X and Y both priced at Rs 3 per unit. If the consumer chooses a combination of these two goods with Marginal Rate of Substitution equal to 3, is the consumer in equilibrium? Give reasons. 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 3

`P_x/P_y = 3/3 = 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.