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Question
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.
Solution
The consumer reaches equilibrium point only when the following condition is satisfied
MRS = `P_x/P_y`
Given that
MRS = 2
`P_x/P_y = 1/1/ = 1`
As MRS is greater than the price ratio, the rational consumer would try to satisfy the condition by increasing the consumption of Good-X and forego the consumption of Good-Y.
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