Question

Marginal rate of substitution of X for Y is higher than the ratio of prices. Explain the reaction of the consumer in this situation.

Answer 1

A consumer strikes his equilibrium when $MR{S}_{XY}=\frac{P_X}{P_Y}$.
In a situation when $MR{S}_{XY}>\frac{P_X}{P_Y}$, equilibrium of the consumer is disturbed. On the assumption that $\frac{P_X}{P_Y}$ remains constant (and also, income of the consumer is constant) equilibrium can be struck only when $MR{S}_{XY}$ starts falling and becomes equal to $\frac{P_X}{P_Y}$. This happens only when the consumer starts consuming more of $X$ in place of $Y$. That is, he moves downward to the right along the IC. Convexity of the IC ensures that as the consumer moves downward to the right along his IC, $MR{S}_{XY}$, tends to fall. Briefly, when $MR{S}_{XY}>\frac{P_X}{P_Y}$ the consumer would react to this situation by substituting $X$ for Y so that $MR{S}_{XY}$, declines and becomes equal to price ratio.