A consumer spends all his income of Rs. 6000 on two goods - Food and clothing and is buying 12 units each of both the goods. At the present level of consumption, the marginal rate of substitution of clothing for food is 3. The price of food per unit is Rs. 400 whereas that of clothing is Rs. 100. What should the consumer do to attain the equilibrium?

He should reduce the consumption of food and increase the consumption of clothing.

The correct answer is Option (1) → He should reduce the consumption of food and increase the consumption of clothing.

At equilibrium, a consumer attains maximum satisfaction when the Marginal Rate of Substitution (MRS) between two goods equals the ratio of their prices, i.e. $MRS_{FC}​ = ​P_F / P_C$

$MRS_{FC}​ = 3​​$

$​P_F  = 400$

$P_C = 100$

$​P_F / P_C = 400 / 100 = 4$

Since MRS (3) < Price ratio (4), the consumer is willing to give up 3 units of clothing for one unit of food, but the market requires 4 units of clothing for one unit of food. This means food is relatively more expensive in terms of satisfaction gained. Therefore, the consumer should reduce consumption of food and increase consumption of clothing until MRS equals the price ratio.