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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
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 = 2/2 = 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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