Question

Suppose a consumer consumes two goods whose MRS = 3. If the price of one good is Rs 30, what is the price of the other good for the consumer to be in equilibrium?

• A. 10
• B. 30
• C. 60
• D. 90

Answer 1

The Correct Option is A

To determine the equilibrium price of the second good, we examine the Marginal Rate of Substitution (MRS) and consumer equilibrium, where utility is maximized within budget limits. This is mathematically expressed as:

\(MRS = \frac {P_1}{P_2}\)

Here:

• MRS, the Marginal Rate of Substitution between the two goods, is 3.
• P₁, the price of the first good, is Rs 30.
• P₂, the price of the second good, is the unknown to be calculated.

Rearranging the equilibrium condition to solve for P₂ yields:

\(P_2 = \frac {P_1}{MRS}\)

Substituting the given values:

\(P_2 = \frac {30}{3} = 10\)

Therefore, the equilibrium price of the second good for the consumer is Rs 10.