Read the passage carefully and answer the questions based on the passage:

Equality of the Marginal Rate of Substitution and the Ratio of the Prices

The optimum bundle of the consumer is located at the point where the budget line is tangent to one of the indifference curves. If the budget line is tangent to an indifference curve at a point, the absolute value of the slope of the indifference curve and that of the budget line are the same at that point. The slope of the indifference curve is the rate at which the consumer is willing to substitute one good for the other. The slope of the budget line is the rate at which the consumer is able to substitute one good for the other in the market. At the optimum, the two rates should be the same. To see why, consider a point where this is not so. Suppose the marginal rate of substitution at such a point is 2 and suppose the two goods have the same price. At this point, the consumer is willing to give up 2 mangoes if she is given an extra banana. But in the market, she can buy an extra banana if she gives up just 1 mango. Therefore, if she buys an extra banana, she can have more of both the goods compared to the bundle represented by the point, and hence, move to a preferred bundle. Thus, a point at which the MRS is greater, the price ratio cannot be the optimum. A similar argument holds for any point at which the MRS is less than the price ratio.

The rate at which the consumer is able to substitute one good for the other in the market is called?

Price Ratio.

The correct answer is Option (1) → Price Ratio.

The price ratio refers to the rate at which the market allows the consumer to substitute one good for another. It is calculated as the ratio of the prices of two goods (i.e., Price of Good X divided by Price of Good Y). This ratio determines how many units of one good a consumer must give up to purchase an additional unit of another good, based on market prices. It represents the slope of the budget line.

In contrast:

• Marginal Rate of Substitution (MRS) refers to the consumer’s willingness to substitute one good for another while maintaining the same level of satisfaction.

• Marginal Rate of Technical Substitution applies in production, not consumption.

• Diminishing marginal rate is a concept, not a defined rate.