Answer to Question #162629 in Microeconomics for Targus

Question

what is an indifference curves? how is an equilibrium achieved in the indifference curves analysis?

Answer 1

An indifference curve shows a combination of two goods that give a consumer the same utility or equal satisfaction making the consumer indifferent. Along the curve, the consumer has a similar preference for any combination of the two goods. It shows different quantities of two goods, points between which a consumer is indifferent in the graph.

In the indifference curves analysis, equilibrium is achieved when the budget line is tangent to the indifference curve. At that point, the marginal rate of substitution of the two goods is equal to the ratio between the two goods’ prices. The budget line shows the combinations of two goods that a consumer can purchase given the income level. The budget line is straight, and where the indifference touches it tangentially is the equilibrium point.

At point the equilibrium point where the consumer will get the maximum utility or satisfaction. Indifference curve above the budget line is unattainable since the level of income does not allow it.