Question

Explain why the marginal rate of substitution must be equal  to the ratio of prices of two goods in equilibrium​

Answer 1

Answer:

Marginal Rate of Substitution (MRS) must be equal to the ratio of prices, also called the Market Rate of Exchange (MRE) to attain consumer equilibrium. ... MRS is the rate at which the consumer is willing to sacrifice units of one good in order to obtain a unit of another.

Answer 2

The Marginal Rate of Substitution (MRS) IS equal to the ratio of prices of two goods in equilibrium.

• A consumer's goal is to maximize utility or satisfaction at all times. Given his or her financial situation and the costs of the goods and services, a rational consumer with clearly stated preferences will always opt for the best package available.
• In other words, a customer always aims to achieve the highest IC given the budget that has been established.
• There will be more of at least one of the products and no less of the other in the consumption bundles that are below the budget limit.
• To put it another way, consumption bundles that are over the budget line will be favored over those that are below it.
• The consumption bundles that are above the budget limit, in contrast, are unaffordable.
• This suggests that the best bundle for the buyer must fall within their budget.

           The slope of IC = The slope of the budget line = MRS