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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.


Solution

Given, PX=Rs. 2 PY=Rs. 2; MRS (marginal rate of substitution) = 2

The consumer attains equilibrium when

MRS = PXPY

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

MRS>PXPY

Using the given values, 2>22

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. 

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