Question
A consumer consumes only two goods X and Y. The Marginal Rate of Substitution is 2. Prices per unit of X and Y are Rs 5 and Rs 4 respectively. Is consumer in equilibrium? What will be the further reaction of the consumer? Give reasons.
Solution
The consumer reaches equilibrium point only when the following condition is satified
`MRS=P_x/P_y`
Given that
`P_x/P_y=5/4=1.25`
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.
Is there an error in this question or solution?
Solution A Consumer Consumes Only Two Goods X and Y. the Marginal Rate of Substitution is 2. Prices per Unit of X and Y Are Rs 5 and Rs 4 Respectively. is Consumer in Equilibrium? What Will Be the Further Reaction of the Consumer? Give Reasons. Concept: Marginal Rate of Substitution (MRS).
