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A consumer consumes only two goods. Why is the consumer said to be in equilibrium when he buy only that combination of the two goods Which lies at that point on the Indifference curve where the budget line is tangent to the indifference curve? Explain. Use diagram.

Answer» <html><body><p></p>Solution :Let the two goods be X and Y as shown in the diagram. The <a href="https://interviewquestions.tuteehub.com/tag/tangent-1238980" style="font-weight:bold;" target="_blank" title="Click to know more about TANGENT">TANGENT</a> is at point E where: slope of indifference curve = Slope of budget line Or `MRS_(xy) = P_(x)//P_(y)`. <br/> The equilibrium purchase is `Ox` of X and `Oy` of Y on the indifference curve `l_(2)` <br/> <img src="https://d10lpgp6xz60nq.cloudfront.net/physics_images/SG_MIC_ECO_C02_S01_031_S01.png" width="80%"/> <br/> The consumer cannot get satisfaction level higher than `l_(2)` because his income not permit him to move above the budget line <a href="https://interviewquestions.tuteehub.com/tag/ab-360636" style="font-weight:bold;" target="_blank" title="Click to know more about AB">AB</a>. The consumer will not like to purchase any other <a href="https://interviewquestions.tuteehub.com/tag/bundle-905567" style="font-weight:bold;" target="_blank" title="Click to know more about BUNDLE">BUNDLE</a> on the budget line AB, for example the bundle at C and D, because they all lie on the lower indifference curve, and give him lower satisfaction. <a href="https://interviewquestions.tuteehub.com/tag/therefore-706901" style="font-weight:bold;" target="_blank" title="Click to know more about THEREFORE">THEREFORE</a>, the equilibrium <a href="https://interviewquestions.tuteehub.com/tag/choice-915996" style="font-weight:bold;" target="_blank" title="Click to know more about CHOICE">CHOICE</a> is only at the tangent point E.</body></html>


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