A consumer consumes only two goods X and Y. At a consumption level of

1.	A consumer consumes only two goods X and Y. At a consumption level of these two goods, he finds that the MRS is higher than the ratio of prices. Explain the reaction of the consumer.
Answer» Given, Px=3 and Py=3, MRS=3 We know that a consumer is said to be in equilibrium when MRS=Px/Py. On substituting the above values, 3=3/3( that is MRS>Px/Py) In this case the consumer is not in equilibrum. This implies that the consumer is willing to pay more for good X than the market requires. Thus the consumer will buy more and more units of X .As a result the MRS will fall due to law of diminishing marginal utility. This will continue till the MRS=Px/Py.

A consumer consumes only two goods X and Y. At a consumption level of these two goods, he finds that the MRS is higher than the ratio of prices. Explain the reaction of the consumer.

Answer»

Given, Px=3 and Py=3, MRS=3

We know that a consumer is said to be in equilibrium when MRS=Px/Py. On substituting the above values, 3=3/3( that is MRS>Px/Py)

In this case the consumer is not in equilibrum. This implies that the consumer is willing to pay more for good X than the market requires. Thus the consumer will buy more and more units of X .As a result the MRS will fall due to law of diminishing marginal utility. This will continue till the MRS=Px/Py.

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A consumer consumes only two goods X and Y. At a consumption level of these two goods, he finds that the MRS is higher than the ratio of prices. Explain the reaction of the consumer.

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