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
The consumer reaches equilibrium point only when the following condition is satified
MRS = 3
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.
Concept: Marginal Rate of Substitution (MRS)
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