7. A consumer consumes only two goods X and Y. The Marginal Rate of Substitution is 1.Prices of X and Y are Rs.3 and Rs.4 per unit respectively.Is the consumer in equilibrium?What will be further reaction of the consumer?Give reason
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see the attachment for answer with explanation
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Explanation:
The consumer reaches equilibrium point only when the following condition is satisfied
MRS = Px/Py
Given that
MRS 1
Px/Py = 3/4= 0.75
As MRS is greater than the price ratio, the rational consumer would try to satisfy the condition by increasing the consumption of Good-X and forego the consumption of Good-Y.
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