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A consumer consumes only two goods X and Y both prices at Rs 2Perunit if the consumer choose a combination of these two goods with Marginal Rate of Substitution equal to 2 , is the consumer in equilibrium ? Give reasons. What will a rational consumer do in this situation ? Explain. |
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Answer» SOLUTION :The equilibrium condition for a rational consumer is Marginal Rate of Substitution `(MRS_(x,y)) ` = MARKET Rate of Exchange `(MRE_(x,y)=P_x//P_y ) ` `2 = 2/2 :. 2 ne 1 ` The above example gives inequality, as `MRS_(x,y)(2) gt MRE_(x,y)(1) [(P_x)/P_y],(MU_x)/(MU_y)gt P_x/P_y` or `(MU_x)/(MU_y)gt P_x/P_y` It means the consumer.s willingness to pay for commodity X is higher than what market values for commodity X So, the consumer should BUY more of X and less of Y to get `MRS = P_x/P_y`In other words, marginal utility from the last rupee willing to spent on commodity X is more than marginal utility from the last rupee willing to spent on Commodity Y . So, to attain the equilibrium the consumer MUST increase the quantity of X, decreases the `MU_x`and decrease the quantity of Y, which will increase the `MU_y`Increase in quantity of X and decrease in quantity of Y continue till `MRS_(x,y)= MRE_(x,y)` |
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