Question

In: Economics

Why is the MRS = to the price ration?

Why is the MRS = to the price ration?

Solutions

Expert Solution

The Marginal Rate of Substitution (MRS) is defined as the rate at which an individual is willing to sacrifice one good in order to obtain one additional unit of the other good.

The MRS is always equal to the price ratio. Suppose there are two goods: X and Y, The MRS is equal to the price ratio (PX/PY).

If MRS is greater than the price ratio then the consumer would willing to sacrifice more units of good Y in order to obtain an additional unit of good X. The consumer will purchase more units of good X than good Y. This means that the consumer values good X more than the good Y. The consumer will continue to purchase more of good X until MRS becomes equal to the price ratio.

If MRS is less than the price ratio then the consumer would be willing to sacrifice more units of good X in order to gain an additional unit of good Y. The consumer will purchase more units of good Y than good X. This means that the consumer values good Y more than the good X. The consumer will continue to purchase more units of good Y until MRS becomes equal to the price ratio.

So, the final outcome is that the MRS must always equal to the price ratio to attain equilibrium.


Related Solutions

Why do small firms credit ration? How does it happen?
Why do small firms credit ration? How does it happen?
2) In anova the f-ration is of?
  2) In anova the f-ration is of? a) sample mean (M) b) sample means (M) divided by variances (SS) c) Two variances (SS) each divided by a corresponding degree of freedom (df) d) Sample variances (SS) divided by sample means (M) 3) For an independent measures research study, Cohen's d helps to describe? a) The risk type I error b) The risk for type II error c) The size of the effect between two samples means without taking into...
what are the difficulties with reporting mode for interval/ ration variables?
what are the difficulties with reporting mode for interval/ ration variables?
Which of the following is a problem (from an efficiency perspective) with ration coupons as an...
Which of the following is a problem (from an efficiency perspective) with ration coupons as an approach to allocate goods in a shortage? Group of answer choices People who value the good the most, don’t get more of it than other people The first people in line buy most of the goods The government misses out on tax revenue Prices go up
Mrs. Mendel and Mrs. Golgi had babies the same day in the same hospital. Mrs. Mendel...
Mrs. Mendel and Mrs. Golgi had babies the same day in the same hospital. Mrs. Mendel took home a baby girl, whom she named Homostasis. Mrs. Golgi took home a baby girl, whom she named Plasmodesmata. Mrs. Golgi began to suspect that her child and the Mendel baby had been switched at birth. Blood tests were done. Mr. Mendel-type B, Mrs. Mendel-type A, Mr. Golgi-type A, Mrs. Golgi-type A, Homostasis-type O, and Plasmodesmata-type B. Had a mix-up occurred ? Explain.
how the stemming and Lemmatization affect a ration of precision and recall with examples ? {does...
how the stemming and Lemmatization affect a ration of precision and recall with examples ? {does increase or decrease]
9. Why must the physician be careful with the amounts of medication ordered? 10. Mrs. Li...
9. Why must the physician be careful with the amounts of medication ordered? 10. Mrs. Li is curt, demanding, and disagreeable toward her daughter-in-law. Why does she act this way? 11. Explain why Mr. Li blames the airplane ride and the Western food for his heart attack. Why does he meditate and do exercises? 12. Is Mr. Li’s stoicism during dying surprising? Why do the family members refuse to discuss his health and possible death?
Mrs. Jones has a serious case of conjunctivitis and the doctor orders chloramphenicol and penicllin. Why...
Mrs. Jones has a serious case of conjunctivitis and the doctor orders chloramphenicol and penicllin. Why would the administration of both of these antibiotics be contraindicated? Explain in detail why.
Mrs. Smith operates a business in a competitive market.  The current market price is $8.10.  At her profit-maximizing...
Mrs. Smith operates a business in a competitive market.  The current market price is $8.10.  At her profit-maximizing level of production, the average variable cost is $8.00, and the average total cost is $8.25.  Mrs. Smith should:                              a. shut down her business in the short run but continue to operate in the long run. b. continue to operate in the short run but shut down in the long run. c. continue to operate in both the short run and long run. d. shut...
How is rationing defined and what criteria are offered to ration care? Discuss and apply at...
How is rationing defined and what criteria are offered to ration care? Discuss and apply at least one of the major ethical theories to the issue and the ethical decision-making process to the issue. What do you feel the impact of the issue in the article will be on the healthcare industry? What can be done to ensure rationing is done fairly? Discuss the major codes of ethics of the stakeholders involved in the issue and how these codes will...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT