Question

Suppose a consumer consumes two goods whose MRS = 3. If the price of one good is Rs 30, what is the price of the other good for the consumer to be in equilibrium?

• A. 10
• B. 30
• C. 60
• D. 90

Answer 1

The Correct Option is A

To find the equilibrium price of the other good, we need to understand the concept of Marginal Rate of Substitution (MRS) and consumer equilibrium in the context of two goods. Consumer equilibrium is achieved when the consumer maximizes utility given their budget constraint. This condition is mathematically represented as follows:

\(MRS = \frac {P_1}{P_2}\)

where:

• MRS is the Marginal Rate of Substitution between the two goods. In this case, \(MRS = 3\).
• P₁ is the price of the first good which is given as Rs 30.
• P₂ is the price of the second good, which we need to find.

We can rearrange the equilibrium condition to express P₂:

\(P_2 = \frac {P_1}{MRS}\)

Substituting the known values into this equation:

\(P_2 = \frac {30}{3} = 10\)

Thus, the price of the other good for the consumer to be in equilibrium is Rs 10.

Answer 2

In consumer equilibrium, the consumer maximizes their utility by allocating their income such that the marginal rate of substitution (MRS) between two goods is equal to the ratio of their prices. This means that the consumer is willing to give up one good for another in proportion to their prices, ensuring the most efficient use of their budget.

Mathematically, this condition can be expressed as:
Price ratio = MRS, or Price of Good 1 / Price of Good 2 = MRS. In this case, if the price of the first good is known and the MRS is given, you can solve for the price of the second good.

For example, if the MRS is 2 and the price of Good 1 is Rs 20, the equation would be:
20 / Price of Good 2 = 2. Solving for the price of Good 2 gives you Rs 10.

Thus, the price of the second good is Rs 10, indicating that in consumer equilibrium, the consumer allocates their spending in such a way that the marginal utility per rupee spent is the same for both goods.