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A consumer consumes only two good 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 be rational consumer do in this situation? Explain. OR A consumer consumes only two goods X and Y whose prices are Rs.5 and Rs.4 respectively. If the consumer chooses a combination of the two goods with marginal utility of X equal to 4 and that of Y equal to 5, is the consumer in equilibrium? Why or why not? What will a rational consumer do in this situation? Use utility analysis. |
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Answer» Solution :At the point of CONSUMER equilibrium the following equality should be met : MRS=`(P_(x))/(P_(y))` According to the question, MRS=2 `(P_(x))/(P_(y))=(2)/(2)=1` So, MRS is greater than the price ratio. Thus, to reach the equilibrium point a rational consumer would decrease the consumption of good y. OR According to the utility APPROACH, a consumer reaches equilibrium where the following equality is met. `(MU_(x))/(P_(x))=(MU_(y))/(P_(y))` According to the given question `(MU_(x))/(P_(x))=(4)/(5)` `(MU_(y))/(P_(y))=(5)/(4)` So,`(MU_(y))/(P_(y))` is greater than `(MU_(x))/(P_(x))`. Thus, to reach the equilibrium, a rational consumer would increase the consumption of good y and decrease that of good x. |
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