Answer to Question #145368 in Economics of Enterprise for Jenneta Modibedi

Question

A. For Kabelo, a consumer of bread and sorghum will be in equilibrium
position if the marginal rate of substitution between the two goods is equal
to ratio of prices of the two goods.’’ Do you agree with the given
statement? Justify your answer. (10 marks).

Answer 1

Yes. I agree with the statement. A consumer in this case of Kabelo, marginal rate of substitution remains fixed along the indifference curve. A given consumer alwaysbaims at maximising his/her utility or in other words the satisfaction level. Thus for bread and sorghum, the budget line is tangent to the indifference curve. Note that it will continue to exist, if Kabelo uses both products exactly the same way.