Question

Q15. A consumer consumes
only two goods X and Y both
priced at Rs.4 per unit. If the
consumer chooses a
combination of two goods with
marginal rate of substitution
equal to 4, then what will bethe consumer
​

Answer 1

Answer:

According to the utility approach, a consumer reaches equilibrium where the following equality is met.

PxMUx=PyMUy

According to the given question:

PxMUx=45=1.25

PyMUy=54=0.8

Since, PxMUx is greater that PyMUy.

Thus, the consumer is not in equilibrium. In order to reach the equilibrium, a rational consumer would increase the consumption of good X and decrease that of good Y.