Why is MUx PX MUy PY?

If MUx/Px > MUy/Py then it means that satisfaction of the consumer derives from spending a rupee on Good X greater than the satisfaction derived from spending a rupee on Good Y. The consumer will reallocate his income by substituting Good X for Good y.

What is MUx and MUy?

consumer by the marginal utility of X, MUx. Similarly, an additional unit of Y. increases the level of satisfaction of a consumer by the marginal utility of Y, MUy. The marginal rate of substitution is equal to the ratio of the marginal.

Why is the marginal rate of substitution equal to the price ratio?

In other words, the MRS (the slope of the indifference curve) must be equal to the price ratio (the slope of the budget line). The reason is that otherwise the consumer could reach a higher indifference curve within the same budget set by altering the chosen bundle.

What is the relationship between marginal utility and marginal rate of substitution?

The marginal rate of substitution is equal to the ratio of the marginal utilities with a minus sign. Thus even though the marginal utilities have no behavioral content their ratio does – it measures the rate at which a consumer is willing to substitute between the two goods.

What happens when Mrsxy PX PY?

a) If MRSXY > PX/PY, it means that the consumer is willing to pay more for X than the price prevailing in the market. As a result, the consumer buys more of X. It induces the consumer to buys less of X and more of Y. As a result, MRS rises till it becomes equal to the ratio of prices and the equilibrium is established.

How is Mrsxy calculated?

The Marginal Rate of Substitution of Good X for Good Y (MRSxy) = ∆Y/ ∆X (which is just the slope of the indifference curve).

How do you get MUx and MUy?

It is important to first understand that this consumption bundle is one in which the slope of the indifference curve (MUx/MUy) is equal to the slope of the budget line (Py/Px). MUx = Y and MUy = X, so MUx/MUy = Y/X is the same as Y/X in mathematics.

What does Mrsxy mean?

The marginal rate of substitution is the rate of exchange between some units of goods X and Y which are equally preferred. The marginal rate of substitution of X for Y (MRS)xy is the amount of Y that will be given up for obtaining each additional unit of X.