Question

What is the true condition for consumer's equilibrium?
Options:

• A. \( \text{MRS}_{XY} = \frac{P_Y}{P_X} \)
• B. \( \text{MRS}_{XY} = \frac{P_X}{P_Y} \)
• C. \( \text{MRS}_{XY} = P_X \times P_Y \)
• D. \( \text{MRS}_{XY} = \frac{1}{P_X \times P_Y} \)

Hint:

The condition for consumer's equilibrium is \( \text{MRS}_{XY} = \frac{P_X}{P_Y} \), ensuring optimal allocation of income across goods.

Answer 1

The Correct Option is B

The consumer is in equilibrium when the Marginal Rate of Substitution (MRS) between two goods \( X \) and \( Y \) is equal to the ratio of their prices, i.e., \( \frac{P_X}{P_Y} \). This ensures that the consumer is maximizing utility given their budget constraint.