Saved Bookmarks
| 1. |
State the conditions of consumer's equilibrium in the Indifference Curve Analysis and explain the rationale behind these conditions |
|
Answer» Solution :LET the only two goods the consumes are X and Y. The two CONDITIONS of equilibrium are: (1) `MRS_(XY) = (P_(X))/(P_(Y))` (2) MRS falls as more of X is consumed in place of Y. Rationale behind these conditions: (1) SUPPOSE `MRS_(XY) gt (P_(X))/(P_(Y))` it means that to obtain one more unit of X, the consumer is willing to sacrifice more units of Y as compared to what is required in the market. It induces the consumer to buy more of X. As a RESULT, MRS falls and continue to fall till it become equal to the RATIO of prices and the equilibrium is established. (Explanation based on `MRS lt P_(X)//P_(Y)` is also correct) (2) Unless MRS falls as consumer consumes more of X, the consumer will not reach equilibrium again. |
|