Question

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.

Answer 1

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

MRS = P_x/P_y

Given that

MRS 1

P_x/P_y = 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.