what will happen if marginal rate of substitution is not equal to slope of price line ie. MRS is not equal to Px/Py ?
explain both the possibilities ?
A consumer attains equilibrium at the point where the budget line is tangent to the indifference curve. This optimum point is characterised by the following equality.
Slope of the IC = Slope of the budget line
Absolute value of the slope of the IC = Absolute value of the slope of the budget line
If, MRS is greater than the price ratio (i.e. ). In this case, the consumer would tend to
move towards equilibrium by giving up some amount of good 2 to increase the consumption of good 1.
On the other hand, if MRS is less than price ratio (i.e. ). Then, to again attain equilibrium, the consumer would give up some amount of good 1 to increase the consumption of good 2.