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.
If a consumer is in equilibrium, the consumer's marginal rate of substitution (MRS) must be equal to the ratio of prices.
The MRS measures the rate at which a consumer is willing to trade one good for another while maintaining the same level of satisfaction. The ratio of marginal utilities represents the consumer's preference for one good over another.
In equilibrium, the consumer will allocate their budget in such a way that the MRS is equal to the ratio of prices. This ensures that the consumer maximizes their utility and is effectively balancing the marginal utility per unit of expenditure across goods.
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