For a consumer to be in equilibrium , why must MRS be equal to price ratio of both the goods ?
Dear student,
Under indifference curve approach, a consumer is in equilibrium when MRS = P1 / P2 .
Marginal Rate of Substitution (MRS) refers to the rate at which the consumer is willing to forego a commodity to obtain more and more of other commodity.
The ratio of prices, on the other hand denote the rate at which the consumer has to sacrifice a commodity to obtain more and more of other commodity.
A consumer cannot opt for any bundle on IC3 as it will be beyond his reach, as his budget line is given.
A consumer can opt for any combination on IC1, but that will not give him maximum utility as it lies on lower indifference curve.
A consumer will be at equilibrium at point E, as it is tangent to budget line and here MRS = P1 / P2 .
Regards
Under indifference curve approach, a consumer is in equilibrium when MRS = P1 / P2 .
Marginal Rate of Substitution (MRS) refers to the rate at which the consumer is willing to forego a commodity to obtain more and more of other commodity.
The ratio of prices, on the other hand denote the rate at which the consumer has to sacrifice a commodity to obtain more and more of other commodity.
A consumer cannot opt for any bundle on IC3 as it will be beyond his reach, as his budget line is given.
A consumer can opt for any combination on IC1, but that will not give him maximum utility as it lies on lower indifference curve.
A consumer will be at equilibrium at point E, as it is tangent to budget line and here MRS = P1 / P2 .
Regards