Answer to Question #175850 in Microeconomics for michele ford

Question

With reference to the indifference theory with good Y on the vertical axis and good X on the horizontal axis, graphically illustrate a change in consumer equilibrium due to a change in income. Suppose that income has increased

Answer 1

Indifferent curve shows two combination of goods which give equal satisfaction to the consumer. Income consumption curve shows points of various consumption of two goods at which consumer are in equilibrium position.

In the graph good Y is on the y-axis as good X is on the x-axis. IC1, IC2 and IC3 are indifferent curves .BL1,BL2 and BL3 are budget lines. Points A, B and C are consumer equilibrium points. From the above graph when income of the consumer changes,the consumer equilibrium points changes too. Equilibrium point A show that the consumer is getting a lower satisfaction than points B and C. When consumer income increases, the consumer Equilibrium points moves from point A to B and from B to C. When we join the equilibrium points we get the income consumption curve which shows different consumer equilibrium combination of two goods at various level of income with various indifferent curves.