Question

Misha is consuming two goods X and Y and in equilibrium. Px=4 and Py=2 . At this point MRS will be equal to 6 . True/False. Give reason. Explain the reaction of the consumer in this situation.

Answer 1

Answer: False

Explanation:

MRS = $\frac{Px}{Py}$ = $\frac{4}{2}$ = 2

Every consumer like Misha has a limited income to spend and hence can buy a limited quantity of different goods.

This income is assumed to be spent on only two goods (for the purpose of explaining the concept) and if the consumer, Misha wants to buy more of Y, she has to buy less of X, because the total income to be spent is the same.

MRS is the marginal rate of substitution or the additional quantity of good Y which Misha purchases by sacrificing some quantity of good X.

Example -

Misha has Rs 10 and buys 2 units of X priced at Rs 4 and 1 unit of Y priced at Rs 2.

Now to buy 1 unit more of Y she needs Rs 2 so she has to reduce the purchase of X.

But X is priced at Rs 4 and since she cannot buy half a unit she has to remove total Rs 4 from X and buy 2 units of Y at Rs 2 each.

So she sacrificed 1 unit of X to buy 2 units of Y.

MRS = $\frac{Additional quantity of Y}{Quantity foregone of X}$ = $\frac{2}{1}$ = 2

Since price is inversely related to the quantity of goods purchased

MRS = $\frac{Px}{Py}$