Answer to Question #255365 in Microeconomics for bibble

Question

Use diagrams to illustrate each of the following:

(i) the equilibrium of a consumer (consumer satisfaction or utility is

maximized) using indifference theory

(ii) how the demand curve for one product is derived for a consumer using her

indifference map.

Answer 1

i)

The consumer optimum level is obtained when MRS_X/P_X = MRS_Y/P_Y. This means marginal utility derived from consumption of x good must be equal to marginal utility derived from good y.

The horizontal axis symbolizes good X, while the vertical axis represents good Y in the diagram. When the budget line is tangent to the maximum possible indifference curve, the consumer is in equilibrium or at their optimum level. Because they continually seek the highest possible indifference curve for the given pay. The consumer is in equilibrium at point E in the diagram, where he spends all of his earnings and follows the maximum possible indifference curve.

ii)

The indifference curve depicts the combinations of two commodities that provide the consumer the same amount of satisfaction at a given income level. A consumer's indifference map is a collection of indifferent curves. The link between the price of an item and the quantity required of that good is depicted by the demand curve.

The horizontal axis in figure-panel A depicts the quantity of good X, whereas the vertical axis measures quantity of good Y. The indifference curves are IC1, IC2, and IC3, while the consumer's budget line is AB1, AB2, and AB3.

The horizontal axis in figure-panel B shows the quantity of good X, while the vertical axis represents the price of item X. At the point where the budget line intersects the indifference curve, people maximize their utility. When the budget line is AB1, the consumer maximizes utility by purchasing X1 quantity of good X, as shown in panel B, at P1. When the budget line is changed from AB1 to AB2, the quantity purchased increases from X1 to X2, as shown in panel B, and the price is P2. When the budget line is changed to AB3, the amount purchased is increased to X3, as shown in panel B, and the price is P3.

As shown in panel B, the demand curve for good X at various prices is constructed by combining the equilibrium points.