Saved Bookmarks
| 1. |
Explain consumer's equilibrium with the help of Indifference Curve Analysis |
Answer» Solution :Consumer's equilibrium refers to the OPTIMUM combination of the two goods which a consumer can afford (given his income and price of two commodities) and this combination gives him maximum satisfaction that he possibly can get.  According to indifference curve analysis, consumer's equilibrium is established at a point where budget LINE is tangent to the highest ATTAINABLE indiference curve. At this point the slope of indifference curve i.e., `MRS ((Delta y)/(Delta x))` is equal to the slope of Budget line, i.e, `("Price of x")/("Price of y")` `:.` At point of consumer equilibrium (E), `MRS = (P_(x))/(P_(y)) or (Delta y)/(Delta x) = (P_(x))/(P_(y))` Conditions for consumer's equilibrium are: (i) Budget line should be tangent to the indifference curve, i.e., `MRS_(xy) = (P_(x))/(P_(y))` i.e., Slope of Indifference curve, `I_(e) =` Slope of Budget line. (iii) MRS is diminishing or Indifference curve is convex to the point of ORIGIN. |
|