Question
Define market rate of exchange.
✓
Answer
The rate at which market requires to sacrifice one commodity to gain an additional unit of another commodity is called market rate of exchange.
$\frac{\text{Change in Quantity of good Sacrificed}(\Delta\text{x}_2)}{\text{Change in Quantity of Good Gained}(\Delta\text{x}_1)}$
$\text{MRE}_\text{ x,y}=\frac{\text{Price of Good Gained}[\text{P}_1]}{\text{Price of Good Sacrificed}[\text{P}_2]}$.
This can be explained with the help of the following diagram. Let consumer's Money Income is 10 and Price of commodity 1 is 2 and price of commodity 2 is 1. i.e., M = 10, P, = 2 and P, = 1. MRE is constant throughout because P, and P, on the basis of which it is calculated are constant throughout.
$\frac{\text{Change in Quantity of good Sacrificed}(\Delta\text{x}_2)}{\text{Change in Quantity of Good Gained}(\Delta\text{x}_1)}$
$\text{MRE}_\text{ x,y}=\frac{\text{Price of Good Gained}[\text{P}_1]}{\text{Price of Good Sacrificed}[\text{P}_2]}$.
This can be explained with the help of the following diagram. Let consumer's Money Income is 10 and Price of commodity 1 is 2 and price of commodity 2 is 1. i.e., M = 10, P, = 2 and P, = 1. MRE is constant throughout because P, and P, on the basis of which it is calculated are constant throughout.
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