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 in equilibrium? Give reasons. Explain what will a rational consumer do in this situation.

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Solution

At the point of consumer equilibrium the following equality should be met :
$M R S = \frac{P_{x}}{P_{y}}$
According to the question,
$M R S = 2$
$\frac{P_{x}}{P_{y}} = \frac{1}{1} = 1$
So, $M R S$ is greater than the price ratio. Thus, to reach the equilibrium point a rational consumer wo and decrease that of good $y$ .

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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 in equilibrium? Give reasons. Explain what will a rational consumer do in this situation.

At the point of consumer equilibrium the following equality should be met : MRS=PxPyAccording to the question, MRS=2PxPy=11=1So, MRS is greater than the price ratio. Thus, to reach the equilibrium point a rational consumer wo and decrease that of good y.