question_answer

A consumer consumes only two goods X and Y both priced at Rs. 8 per unit. If the consumer chooses a combination of these two goods with marginal rate of substitution equal to 8, is the consumer is equilibrium? Give reasons. Also explain, what will a rational consumer do in this situation?

Answer:

 Given,  \[{{P}_{X}}\]  Rs. 8, \[{{P}_{Y}}\]MRS\[_{XY}\]=8 Consumer's equilibrium is attained where \[MR{{S}_{XY}}=\frac{{{P}_{X}}}{{{P}_{Y}}}\Rightarrow 8>\frac{8}{8};\] \[\therefore MR{{S}_{XY}}>\frac{{{P}_{X}}}{{{P}_{Y}}}\], so the consumer is not in equilibrium.                                                                                                 Here, consumer can attain equilibrium only when\[MR{{S}_{XY}}\]starts falling and becomes equal to\[\frac{{{P}_{X}}}{{{P}_{Y}}}\](on the assumption that\[\frac{{{P}_{X}}}{{{P}_{Y}}}\]is constant). This happens only when consumer starts consuming more of X in place of Y so, that he moves downward to right along the 1C. So, if\[MR{{S}_{XY}}=\frac{{{P}_{X}}}{{{P}_{Y}}}\] then a rational consumer would react by substituting X for Y