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.
The consumer reaches equilibrium point only when the following condition is satisfied
MRS = Px/Py
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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