A consumer consumes only two goods, each priced at Rupee one per unit. If the consumer chooses a combination of the two goods with marginal rate of substitution equal to 2, is the consumer at equilibrium? Give reasons. Explain what a rational consumer would do in this situation.

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Solution

Given, $P_{X} = R s . 1$ ; $P_{Y} = R s . 1$

MRS (marginal rate of substitution) = 2

The consumer attains equilibrium when

MRS $= \frac{P_{X}}{P_{Y}}$

In the given question, the consumer is not in the equilibrium because here,

$M R S > \frac{P_{X}}{P_{Y}}$

Using the given values, $2 > \frac{1}{1}$

The consumer would react to this situation by consuming more of good X in place of good Y. This will lead to a decline in MRS and the consumer would reduce consumption of Y until the MRS equals the price ratio, i.e. 1.

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