Question

A consumer consumes 2 goods X and Y and both are priced at 3 per unit. If the consumer chooses a combination of these 2 goods with MRS=3 is the consumer in equilibrium. Give reason. What will a rational consumer do in this situation? Explain.

Answer 1

Vishva, as per Ordinal Approach, a consumer will attain equilibrium, when the following equality is met.
$\boxed{MRS=-\frac{∆y}{∆x}=-\frac{Px}{Py}}$
As per the question:
$$\begin{gathered} -3\ne -\frac{3}{3} \\ \mathrm{or},3\ne 1 \end{gathered}$$
Hence, the above statement is false, since the equality is not met. In this case, since MRS > Price ratio, so a rational consumer will increase the consumption of Good X by sacrificing few units of Good Y. This will continue till the point, when the equality is matched between MRS and Price ratio.