Micro

Consumer Behaviour

Medium

Comprehension:

Read the passage carefully and answer the questions based on the passage:

Equality of the Marginal Rate of Substitution and the Ratio of the Prices

The optimum bundle of the consumer is located at the point where the budget line is tangent to one of the indifference curves. If the budget line is tangent to an indifference curve at a point, the absolute value of the slope of the indifference curve and that of the budget line are the same at that point. The slope of the indifference curve is the rate at which the consumer is willing to substitute one good for the other. The slope of the budget line is the rate at which the consumer is able to substitute one good for the other in the market. At the optimum, the two rates should be the same. To see why, consider a point where this is not so. Suppose the marginal rate of substitution at such a point is 2 and suppose the two goods have the same price. At this point, the consumer is willing to give up 2 mangoes if she is given an extra banana. But in the market, she can buy an extra banana if she gives up just 1 mango. Therefore, if she buys an extra banana, she can have more of both the goods compared to the bundle represented by the point, and hence, move to a preferred bundle. Thus, a point at which the MRS is greater, the price ratio cannot be the optimum. A similar argument holds for any point at which the MRS is less than the price ratio.

The economic concept at which the consumer is willing to substitute one good for the other?

Price Ratio.

Marginal rate of substitution.

Marginal rate of technical substitution.

Diminishing marginal rate.

✅ Correct Option: 2

Option 1: Price Ratio -> This represents the relative prices of two goods but doesn't measure consumer's willingness to substitute.

Option 2: Marginal rate of substitution -> This is the rate at which a consumer is willing to exchange one good for another while maintaining the same satisfaction level.

Option 3: Marginal rate of technical substitution -> This applies to production theory, not consumer behavior, measuring input substitution in production.

Option 4: Diminishing marginal rate -> This is a principle describing how MRS changes, not the concept itself.

Hence, Option 2: Marginal rate of substitution -> The Marginal Rate of Substitution (MRS) is the economic concept that measures the rate at which a consumer is willing to give up one good (say Good Y) to obtain an additional unit of another good (say Good X) while maintaining the same level of utility or satisfaction. It is represented by the slope of the indifference curve and shows the trade-off consumers are willing to make between two goods. For example, if MRS is 2, the consumer is willing to give up 2 units of Good Y for 1 unit of Good X -> correct

Question 42

The rate at which the consumer is able to substitute one good for the other in the market is called?

Question 43

The exceptional case in optimal choice of the consumer is where ..................

Question 44

The optimum bundle of the consumer is located at the point where..................?

Question 45

A consumer is willing to give up 4 bananas if it is given an extra mango, but in the market, if it gives up 6 bananas, this bundle will be considered.

The economic concept at which the consumer is willing to substitute one good for the other?

Solution

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