# 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

• 9

when mrsxy is greater than the px py it shows more than the satisfaction amount in the consumers ie more of good x's price over the priceof good y

and when the price of good y is more than the satisfactionm level among the consumers ie mrsxy is less than pxpy

• 4
What are you looking for?