Q.A consumer's MRSxy at the current combination is 3, while Px = Rs. 6 and Py = Rs. 3. Is the consumer in equilibrium? If not, in which direction should the consumer adjust consumption?

Equilibrium requires MRSxy to equal the price ratio Px/Py; here MRSxy exceeds it, so the consumer should buy more X.

Step 1 — Compute the price ratio. Px/Py = 6/3 = 2.

Step 2 — Compare with MRSxy. The given MRSxy = 3 is greater than Px/Py = 2. This means the consumer is willing to give up 3 units of Y for one more unit of X, while the market only requires giving up 2 units of Y to buy one more unit of X — X is, in effect, cheaper to the consumer than their own preferences would justify, so the consumer is not yet in equilibrium and stands to gain by buying more X.

Step 3 — Direction of adjustment. The consumer should consume MORE of X and LESS of Y. As X consumption rises, MRSxy falls (the property of a diminishing marginal rate of substitution along a convex indifference curve), moving towards the price ratio of 2. The consumer should keep substituting X for Y until MRSxy falls exactly to 2, at which point the tangency condition is met and equilibrium is reached. …

A common mistake is comparing MRSxy directly to the individual prices instead of to their RATIO, or getting the direction of adjustment backwards — when MRSxy is greater than Px/Py, the consumer …