Because all consumers are equating their marginal rates of substitution to the price ratio, when the price ratio equals the ratio of marginal costs, the consumers are also equating their marginal rates of _______________ to the ratio of marginal _______________, which is in turn equal to the marginal rate of _______________.

Question

Quizplus · Accepted Answer

The sentence is referring to the equilibrium condition in a competitive market where the price ratio equals the ratio of marginal costs. At this equilibrium, consumers are equating their marginal rates of substitution to the price ratio which is also equal to the marginal rate of transformation (MRT). Therefore, the sentence is stating that consumers are equating their marginal rates of substitution to the ratio of marginal costs, which is in turn equal to the marginal rate of transformation. This makes sense because the MRT is the rate at which one good can be transformed into another and is equal to the ratio of marginal costs in a competitive market. Therefore, the best choice is B.

Because All Consumers Are Equating Their Marginal Rates of Substitution