Answer to Question #298269 in Microeconomics for garg

Question

Using ordinal approach show the consumer equilibrium. How will a change in income

affect the consumer equilibrium if x is an inferior good and Y normal good (use X good on

horizontal axis and Y on Vertical axis).

Answer 1

Using ordinal approach show the consumer equilibrium

According to the Ordinal Approach to Consumer Equilibrium, a consumer has reached equilibrium when his total utility (satisfaction) is maximized for a given level of income and current pricing of products and services.

The ordinal method defines two consumer equilibrium conditions: Necessary or First Order Condition and Supplementary or Second-Order Condition.

The indifference curve, which displays all those combinations of goods that offer the consumer the same level of satisfaction, is the most fundamental tool in ordinal demand analysis. In other words, a consumer prefers all combinations of the commodities on his indifference curve equally.

The indifference curve of ordinal approach to show consumer equilibrium:

Three indifference curves, viz. IC1, IC2, and IC3 are shown in the diagram above, each representing a hypothetical consumer's indifference map. The hypothetical budget line is AB. The indifference curve IC2 and the Budget line AB cross at point 'E,' resulting in the slope of IC2 = AB. Both the required and supplemental conditions are satisfied at this point, and the consumer achieves equilibrium at point 'E.'

How will a change in income affect the consumer equilibrium if x is an inferior good and Y is normal good (use X good on the horizontal axis and Y on the vertical axis).

The budget constraint shifts to the right as income rises. The new budget limitation will now be tangent to a higher indifference curve, indicating a greater degree of utility in graphical terms. A decrease in income causes the budget constraint to shift to the left, making it tangent to a lower indifference curve, indicating a lower level of utility.

When the income increase, more normal goods will be bought while a few inferior goods will be bought. This is shown graphically as:

Therefore, the quantity of good X will decrease from Q3 to Q2 since the indifference curve will shift from I₁ to I₂. while the quantity of Y will increase. The new budget constraint is B-3 from B-1.