A consumer consumes only two goods X and Y both priced at Rs. 3 per unit . If a cosumer chooses a combination of these two with Marginal Rate of Subst
A consumer consumes only two goods X and Y both priced at Rs. 3 per unit . If a cosumer chooses a combination of these two with Marginal Rate of Substitution equal to 3, is the consumer in equilibrium ? Give reasons . What will a rational consumer do in this situation ?
1 Answers
Given Px=3 , Py =3 and MRS =3 , A consumer is said to be in equilibrium when :
`MRS =(P_(x))/(P_(y))`
Substituting values we find that : `3gt(3)/(3)`
i.e `MRS gt(P_(x))/(P_(y))`
Therefore consumer is not equilibrium.
`MRS gt(P_(x))/(P_(y))` means that consumer is willing to pay more for one more unit of X as compared to what market demands.
- The consumer will buy more units of X.
- As a result MRS will fall due to the Law of Diminishing Marginal Utility .
- This will continue till MRS `=(P_x)/(P_(y))` and consumer is in equilibrium.