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Question
A consumer consumes only two goods X and Y. Marginal rate of substitution is 3 and per unit prices of X and Y is Rs 4 and Rs 2 respectively. Is the consumer in equilibrium? What will be the further reaction of the consumer? Give reasons
Solution
The consumer reaches equilibrium point only when the following condition is satified
`MRS=P_x/P_y`
Given that
MRS = 3
`P_x/P_y=4/2=2`
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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