At the equilibrium consumption bundle, which of the following holds? MRSX,Y = PY/PX. MRSX,Y = −PX/PY....

At the equilibrium consumption bundle, which of the following holds?

MRS_X,Y = P_Y/P_X.
MRS_X,Y = −P_X/P_Y.
MRS_X,Y = P_X/P_Y.
MRS_X,Y = −P_Y/P_X.

Solutions

Expert Solution

Answer Option 3 MRSxy=Px/Py

Explanation:

Suppose there are two goods X and Y

Price of good X =Px

Price of good Y = Py

Marginal rate of substitution (MRS) is the rate at which the consumer is substituting one good with another good, therefore MRSxy=∆Y/∆X=MUx/MUy

Slope of the price line = Price of good X/ price of good Y = Px/Py

At equilibrium consumption bundle or utility maximising combination the marginal rate of substitution (MRS) must be equal with the slope of the price line, therefore at equilibrium combination, MRSxy= Price of X/ Price of Y

At equilibrium combination, MRSxy= Px/ Py therefore Option 3 is true

Slope of price line cannot be Py/Px, therefore option 1 is not true

Slope of price line cannot be negative, like -Px/Py and –Py/Px because price line does not shows any trade off. It only shows the possible combination that the consumer can afford with his given budget. Therefore option 2 and option 4 is not true

Rahul Sunny answered 1 month ago

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