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

One good is more preferred than another.

Entire income is spent on one of the goods only.

Partial spending of income on both goods.

Both goods are preferred in same quantity.

✅ Correct Option: 2

Option 1 -> This describes preference but not the exceptional case of consumer equilibrium.

Option 2 -> This is a corner solution where the budget line and indifference curve do not have a tangency point in the interior, leading to consumption of only one good.

Option 3 -> This represents the typical/normal case where consumer consumes both goods at the tangency point (interior solution).

Option 4 -> This is a specific preference case but not necessarily the exceptional scenario in consumer optimization.

Hence, Option 2: Entire income is spent on one of the goods only -> In consumer theory, the typical optimal choice occurs at the tangency point where the indifference curve touches the budget line (MRS = price ratio), resulting in consumption of both goods. The exceptional case is a "corner solution" where no tangency exists in the interior. This happens when one good provides so much more utility per rupee that the consumer maximizes satisfaction by spending the entire budget on just that one good, with consumption bundle at one of the axes. -> correct

Question 41

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

Question 42

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

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

Solution

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