Question

a consumer consumes two commodity explain consumer equilibrium with the help of indifference curve or indifference analysis

Answer 1

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Consumer's Equilibrium

Now we have both budget lines and indifference map of the consumer. A budget line represents consumer’s limited resources (what is feasible) and indifference map represent consumer’s preferences (what is desirable). The question now is that how the consumer is going to optimize his limited resources. An answer for this question would be consumer’s equilibrium. In other words, the consumer’s equilibrium means the combination of commodities that maximizes utility, given the budget constraint. To obtain consumer’s equilibrium graphically, you just need to superimpose the budget line on the consumer’s indifference map. This is shown in figure 5.

At point E, consumer’s equilibrium is attained. Because the indifference curve IC2 is the best possible indifference curve that the consumer can reach with the given resources (budget line). The tangency of indifference curve IC2 and the price line represent the above statement. At the point of tangency, the slope of the budget line (Px/Py) and the marginal rate of substitution (MRSxy = MUx/MUy) are equal: MUx/MUy = Px/Py (first condition for consumer’s equilibrium). From figure 5, we can understand that the second condition for consumer’s equilibrium (indifference curve must be convex to the origin) is also fulfilled.

A small algebraic manipulation in the above equation gives us MUx/Px = MUy/Py, which is the marginal utility per dollar rule for consumer’s equilibrium. Thus, all the conditions for consumer’s equilibrium are fulfilled. The combination (X0Y0) is an optimal choice (point E) for the consumer.

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