Define consumer's equilibrium. Explain its condition under indifferenc

1.	Define consumer's equilibrium. Explain its condition under indifference curve analysis.
Answer» Given income of the consumer and the prices goods he buys, the consumer is said to be in equilibrium when he spends income in such a way that he gets maximum satisfaction. (i) Marginal Rate Substitution (MRS)= P_x/P_y (ii) MRS falls as more is consumed of X. Explanation: (i) Suppose MRS> P_x/P_y. It means that consumer is willing to pay more for goods X, than the prevailing market price. Consumer buys more of X and less of Y till MRS= P_x/P_y again. (ii) Unless MRS has a tendency to fall as more is purchased the consumer will never reach equilibrium again. (Note: Explanation MRS< P_x/P_y is also correct)

Define consumer's equilibrium. Explain its condition under indifference curve analysis.

Answer»

Given income of the consumer and the prices goods he buys, the consumer is said to be in equilibrium when he spends income in such a way that he gets maximum satisfaction.

(i) Marginal Rate Substitution (MRS)= P_x/P_y

(ii) MRS falls as more is consumed of X.

Explanation:

(i) Suppose MRS> P_x/P_y. It means that consumer is willing to pay more for goods X, than the prevailing market price. Consumer buys more of X and less of Y till MRS= P_x/P_y again.

(ii) Unless MRS has a tendency to fall as more is purchased the consumer will never reach equilibrium again.

(Note: Explanation MRS< P_x/P_y is also correct)

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