Answer to Question #163876 in Microeconomics for maddz

Question

1. Define Indifference curve with its properties and Budget line. Write their slopes and explain the consumer equilibrium (Use Diagram).

Answer 1

Indifference curve is a graph showing combination of two goods that yield equal satisfaction and utility to the consumer.

The properties of indifference curves are: indifference curves can never intercept, the farther out an indifference curve lies, the higher the utility it indicates, indifference curves always slope downwards and indifference curves are convex.

Budget line shows combination of two goods that a consumer is able to consume, given a budget constrain.

The slope of the budget line $=px/py$

The slope of indifference curve=px/py

IC1, IC2 and IC3 are indifference curves while AB is the budget line. With the constraint of budget line, the highest indifference curve a consumer can reach is IC2. The budget line is tangent to indifference curve IC2 at point E which is the point of consumer equilibrium where the consumer purchases OM quantity of commodity X and ON quantity of commodity Y.