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.

A consumer is willing to give up 4 bananas if it is given an extra mango, but in the market, if it gives up 6 bananas, this bundle will be considered.

Inferior bundle.

The correct answer is Option (4) → Inferior bundle.

A consumer achieves an optimum bundle when their willingness to substitute one good for another (MRS) perfectly matches the rate at which they can substitute them in the market (Price Ratio). That is, MRS = Price Ratio.

Given:

• MRS (Marginal Rate of Substitution) = 4 bananas per mango (consumer is willing to give up 4 bananas for 1 mango)

• Market price ratio = 6 bananas per mango (consumer must give up 6 bananas to get 1 mango)

• MRS (4) < Price Ratio (6).

  What does MRS < Price Ratio imply?

  • The consumer values one additional mango at 4 bananas (internally).

  • The market values one additional mango at 6 bananas (externally).

  Since the mango costs 6 bananas in the market, but the consumer only values it at 4 bananas, the mango is "too expensive" for the consumer at this margin. The consumer is not getting enough utility from the mango compared to its market cost in terms of bananas. Therefore, from this current bundle, the consumer can achieve higher utility by reducing consumption of mangoes and increasing consumption of bananas. By moving away from this bundle, they can reach a better, preferred bundle.

Conclusion for the Current Bundle: Because the consumer can achieve a higher level of utility by reallocating their consumption (moving towards more bananas and fewer mangoes), the current bundle is not optimal. It is an Inferior bundle compared to what they can achieve within their budget constraint.