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| 1. |
What do you undrrstand by consumer equilibrium.show it with the help of indifference curve analysis |
| Answer» Consumer Equilibrium : It is a situation when the consumer gets maximum satisfaction with the given income and the given market prices. Indifference curve approch of consumers equillibrium:\xa0According to the indifference curve analysis, consumer\'s equilibrium is at a point where the slope of indifference curve is equal to the slope of budget line or price line.Two conditions of the consumer\'s equilibrium are :\tIndifference curve must be tangent to the budget line which means that the slope of indifference curve Should be\xa0equal to the slope of budget line. Marginal Rate of Substitution of X on Y= ratio of the prices of the two goods i. e.\xa0{tex}\\left( M R S _ { x y } \\right) = \\frac { \\text { Price of } X \\left( P _ { x } \\right) } { \\text { Price of } Y \\left( P _ { y } \\right) }{/tex}\tAt the point of MRS =Px/Py, indifference curve must be convex to the origin. It implies that at the point of equilibrium, MRS must be diminishing i.e. the rate at which one good is sacrificed for another should be falling.\xa0In the diagram given, P is the equilibrium point at which budget line touches the higher Indifference Curve IC2, within the consumer budget.\tPoint A could not be the point of equilibrium because at point A, MRS > Px / Py.\xa0Hence consumer will prefer to consume more of good X and less of good Y, as a result, Marginal utility of X (MUX) will fall and Marginal utility of Y (MUy) will rise, this process will continue till the time MRS =PX/Py.\tAt point B MRS < Px/Py,\xa0hence consumer will demand more of good Y and less of good X.\xa0Because of this MUX will rise and MUy will fall till the time MRS =PX/Py. So, the consumer will be at equilibrium only at point P.\xa0 | |