Question : If a consumer is in equilibrium, the consumer's marginal rate of substitution (MRS) must be equal to:
Option 1: The price of X.
Option 2: The price of Y.
Option 3: The ratio of marginal utilities.
Option 4: The ratio of prices.
Correct Answer: The ratio of prices.
Solution : The correct answer is (d) The ratio of prices.
Consumer equilibrium occurs when the consumer maximizes their utility given their budget constraint. At equilibrium, the consumer allocates their expenditure in a way that the marginal utility per dollar spent is equal across all goods. This implies that the MRS, which represents the rate at which the consumer is willing to trade one good for another, must be equal to the ratio of the prices of the goods.
The consumer will continue to adjust their consumption until the MRS equals the price ratio, as this ensures that they are getting the same marginal utility per dollar spent across different goods.
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