Question

A consumer consumes only two goods X and Y, both priced at Rs. 2 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? Why, or why not? What will a rational consumer do in this situation? Explain.

Answer 1

Given, $P_X=Rs.2$ $P_Y=Rs.2$; 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,

$MRS>\frac{P_X}{P_Y}$

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

The consumer would react to this situation by consuming more of good X in place of good Y. This will decrease the MRS, and the consumer will increase consumption of X until MRS equals 1.