A 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.
A 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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The Consumer is not in equilibrium because:
MRS> Px/Py or 3/4
Since the consumer is willing to pay more for Good X than the market requires, the consumer will buy more of Good X and less of Good Y, continue to do so till MRS declines enough to become equal to Px/Py.
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