[amp_mcq option1=”$$\frac{{M{U_x}}}{{M{U_y}}} > \frac{{{P_x}}}{{{P_y}}}$$” option2=”$$\frac{{M{U_x}}}{{M{U_y}}} < \frac{{{P_x}}}{{{P_y}}}$$" option3="$$\frac{{M{U_x}}}{{M{U_y}}} = \frac{{{P_x}}}{{{P_y}}}$$" option4="None of these" correct="option3"]
The correct answer is C.
Consumer equilibrium is a state in which a consumer has allocated their budget in such a way that they are maximizing their utility. This means that they are consuming the combination of goods and services that gives them the most satisfaction, given their budget and the prices of goods and services.
The condition for consumer equilibrium is that the marginal rate of substitution (MRS) between any two goods is equal to the ratio of their prices. The MRS is the rate at which a consumer is willing to trade one good for another. It is measured as the amount of good Y that a consumer is willing to give up to get one more unit of good X.
The price ratio is the ratio of the prices of two goods. It is measured as the price of good Y divided by the price of good X.
When the MRS is equal to the price ratio, the consumer is in equilibrium. This is because the consumer is getting the same amount of satisfaction from consuming one more unit of good X as they would from consuming one less unit of good Y.
Option A is incorrect because it states that the MRS is greater than the price ratio. This means that the consumer is willing to give up more of good Y to get one more unit of good X than they would have to pay for one more unit of good X. This is not a state of equilibrium, because the consumer could increase their satisfaction by consuming more of good Y and less of good X.
Option B is incorrect because it states that the MRS is less than the price ratio. This means that the consumer is willing to give up less of good Y to get one more unit of good X than they would have to pay for one more unit of good X. This is also not a state of equilibrium, because the consumer could increase their satisfaction by consuming less of good Y and more of good X.
Option D is incorrect because it states that none of the above is true. However, we have shown that option C is true, so option D must be false.