Consumer Consumes Only Two Goods X and Y. the Marginal Rate of Substitution is 1. Prices of X and Y Are Rs 3 and Rs 4 per Unit Respectively. is the Consumer in Equilibrium? What Will Be Further Reaction of the Consumer? Give Reason. - Economics

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consumer consumes only two goods X and Y. The Marginal Rate of Substitution is 1. Prices of X and Y are Rs 3 and Rs 4 per unit respectively. Is the consumer in equilibrium? What will be further reaction of the consumer? Give reason.

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Solution

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

MRS = Px/Py

Given that

MRS 1

Px/Py = 3/4 = 0.75

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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2015-2016 (March) Foreign Set 1
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