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.

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.

Preferred bundle.

Optimum bundle.

Most preferred bundle.

Inferior bundle.

✅ Correct Option: 4

Option 1 -> If the consumer gives up 6 bananas for 1 mango when they're only willing to give up 4, this is not preferred.

Option 2 -> At optimum, MRS equals the market rate. Here MRS (4) ≠ Market rate (6), so not optimum.

Option 3 -> Cannot be most preferred when consumer is overpaying compared to their willingness.

Option 4 -> The consumer values 1 mango at 4 bananas but market forces them to give up 6 bananas, making them worse off.

Hence, Inferior bundle -> The consumer's MRS (Marginal Rate of Substitution) is 4 bananas for 1 mango, meaning they are willing to sacrifice only 4 bananas for an additional mango. However, the market exchange rate requires giving up 6 bananas for 1 mango. Since the consumer must give up MORE bananas (6) than they value the mango at (4 bananas), they are overpaying in their subjective terms. This trade makes the consumer worse off, resulting in an inferior bundle compared to their original position. The consumer is trading at unfavorable terms where the market rate exceeds their personal valuation. -> 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 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..................?

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.

Solution

More from this set:

Keyboard Shortcuts

CUET Economics Past Year Questions (Topic-Wise)