Question

Explain the condition of consumer equilibrium under indifference curve approach

Answer 1

Condition 1. Slope of IC=slope of budget line. - in the given diagram there are 3 IC. I.e, IC1 , IC2, and IC3 and AB is the budget line now IC3 is ruled out because it is unattainable. Point C and. D is lying lower indifference curve I.e,at IC 1 which indicates a low level of satisfaction. with the constant of budget line the highest indifference curve which the consumer can reach IC2, I.e,at the point where budget line is tangent to indifference curve this is the point of consumer equilibrium where the consumer purchase OM unit of good X and ON units of goodY. There are two conditions when consumer is not in equilibrium . 1. MRS>px/ py= in this case consumer is not an equilibrium he is getting more marginal utility from X as compared to Y so to bring consumer in equilibrium he will increase the consumption of X and decrease the consumption of Y till the consumer strives in equilibrium MRs = px/py . 2. MRs< PX/py= in this case consumer is not in equilibrium he's getting more marginal utility from Y as compared to X so to bring consumer in equilibrium has to increase the consumption of Yand decrease the consumption of X till the consumer strives its equilibrium is MRs= PX / p y