A consumer consumes only two goods 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.

Solution

At the point of consumer equilibrium, the following equality should be met:
MRS = Px/Py
MRS = 3 (given)
Px/Py= 3/3 = 1
Thus, MRS is greater than the price ratio.
In order to reach the equilibrium point, a rational consumer would increase the consumption of good X and decrease that of good Y.

Or
According to the utility approach, a consumer reaches an equilibrium where the following equality is met.
MUx/Px = MUY/Py
MUx/Px =5/4 (given)
MUY/Py = 4/5
So MUx/Px is greater than MUY/Py . Thus a rational consumer has to increase the consumption of good X and decrease that of good Y in order to reach equilibrium.

Some More Questions From Theory Of Consumer Behaviour Chapter

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Theory Of Consumer Behaviour

Some More Questions From Theory Of Consumer Behaviour Chapter

What is meant by marginal rate of substitution (MRS)?

Why is MRS always diminishing?

When does a consumer attain equilibrium according to indifference curve approach?

Give meaning of demand.

Name two determinants of demand.

List the factors that cause changes in demand.

What is law of demand?

What is demand schedule?

Why does demand curve slope downwards?

Differentiate between substitute and complementary goods.

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