State the conditions of consumer’s equilibrium in the Indifference curve analysis and explain the rationale behind these conditions.
Answers
Occurs at a position where price line is tangent to the highest attainable indifference curve.
The following conditions apply to achieve the consumer equilibrium:
1.Budget line should be tangent to the indifference curve-because only at this point does the consumer get maximum satisfaction and it is within his budget.
2. Slope of the price line should be equal to the slope of the indifference curve-consumers only get maximum satisfaction at a point where the price line is tangent to the highest possible indifference curve from below.
3.Indifference curve should be convex to the origin-this ensures that at the point of equilibrium ,the marginal rate of substitution is diminishing.
Answer:
Consumer equilibrium refers to a situation whereby the consumer gets maximum satisfaction with no intention of changing it subject to a given price and his income.
Occurs at a position where price line is tangent to the highest attainable indifference curve.
Explanation:
The following conditions apply to achieve the consumer equilibrium:
1.Budget line should be tangent to the indifference curve-because only at this point does the consumer get maximum satisfaction and it is within his budget.
2. Slope of the price line should be equal to the slope of the indifference curve-consumers only get maximum satisfaction at a point where the price line is tangent to the highest possible indifference curve from below.
3.Indifference curve should be convex to the origin-this ensures that at the point of equilibrium ,the marginal rate of substitution is diminishing.