In order to determine whether Mr. Abebe is at his equilibrium point, we need to compare his marginal rate of substitution (MRS) to the price ratio of coffee and bread.
MRS is defined as the rate at which a consumer is willing to exchange one product for another while maintaining the same level of satisfaction. In this case, since Mr. Abebe's MRS between coffee and bread is one, it means that he is willing to give up one cup of coffee for one loaf of bread.
The price ratio of coffee and bread is calculated by dividing the price of one cup of coffee by the price of one loaf of bread. In this case, the price ratio is 10/5 = 2.
If Mr. Abebe is at his equilibrium point, his MRS should be equal to the price ratio. However, in this case, the MRS is 1 while the price ratio is 2. This means that Mr. Abebe is not at his equilibrium point.
To reach his equilibrium point, Mr. Abebe would need to adjust his consumption of coffee and bread until his MRS is equal to the price ratio. Since his MRS is currently lower than the price ratio, it means that he values bread more than coffee. Thus, to reach his equilibrium point, Mr. Abebe could decrease his consumption of coffee and increase his consumption of bread until his MRS equals the price ratio of 2.
asume Mr. Abebe spent all his daily income of birr 100 on food, and he purchased
bread and coffee. The price of a loaf of bread was birr 5, and the price of a cup of coffee was
birr 10. If Mr Abebe purchased 5 cups of coffee and 10 loaf of bread, and made his marginal
rate of substitution between coffee and bread to be one, was Mr Abebe at his equilibrium
point? If yes, explain how? If no, explain how he could have managed to reach his
equilibrium point?
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