Consuming two goods X and Y, Maliha is in equilibrium when prices of the two goods are Rs.30 and Rs.15 per unit respectively. At this point what should be the value of marginal rate of substitution?
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Asked on December 26, 2019 by
Samruta Shriya
A consumer consumes only two goods X and Y. Her money income is Rs.24 and the prices of Goods X and Y are Rs.4 and Rs.2 respectively. Answer the following questions:
(i) Can the consumer afford a bundle 4X and 5Y? Explain
(ii) What will be the MRS
XY
when the consumer is in equilibrium? Explain.
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ANSWER
(i) No, the consumer cannot afford a bundle of 4X and 5Y.
Given, money income =Rs.24;P
X
=Rs.4 and P
Y
=Rs.2, if he purchases 4X and 5Y, then
4×4+5×2=26>24
Therefore, he is not able to buy a bundle of 4X and 5Y.
(ii) When the consumer is in equilibrium : MRS
XY
=
P
Y
P
X
The price ratio indicates that for every additional unit of Good−X, the consumer has to sacrifice 2 units of Good−Y. So that price ratio is 2:1. Accordingly, in a state of equilibrium, the marginal rate of substitution between Good−X and Good−Y must be equal to 2:1.