InterviewSolution
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InterviewSolution
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A consumer consumes only two good X and Y both priced at Rs.3 per unit. If the consumer chooses a combination of these two goods with Marginal Rate of Substitution equal to 3, is the consumer in equilibrium ? Give reasons. What will a rational consumer do in this situation ? Explain. OR A consumer consumes only two goods X and Y whose prices are Rs.4 and Rs.5 per unit respectively. If the consumer chooses a combination of the two goods with marginal utility of X equal to 5 and that of Y equal to 4, is the consumer in equilibrium? Give reason. 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=3 `(P_(x))/(P_(y))=(3)/(3)=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))=(5)/(4)` `(MU_(y))/(P_(y))=(4)/(5)` So, `(MU_(x))/(P_(x))` is greater than `(MU_(y))/(P_(y))`. Thus, to reach the equilibrium, a rational consumer would INCREASE the consumption of good x and decrease that of good y. |
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