Answer to Question #195592 in Microeconomics for belinda

Question

1. Use a graph to illustrate and explain the concept of consumer equilibrium for a consumer,johannes, who consumes only two goods:biltong(vertical axis) and beer(horizontal axis)
2. Now indicate on your graph and explain the effect of a decrease in the price of biltong on consumer equilibrium.

Answer 1

1.

In the case where a consumer consumes only two commodities, indifference curves are used to show all the possible combinations of the two commodities that yield equal satisfaction levels to the consumer. An individual's total utility given their budget, is called the consumer equilibrium. A line that joins all combinations of two goods a consumer can purchase using his entire income is called a budget line.

By use of the indifference curve and the budget line, the point of equilibrium of the consumer can be graphically represented as shown below;

combination A gives the maximum satisfaction given that the consumers’ income is fixed.

2.

Suppose the price of biltong falls, with price of beer and income level (I) remaining unchanged, The budget line will tilt outwards to the right from AB to AB' to AB' ' as shown below