A consumer consumes only two goods X and Y, whose price are Rs.4 and Rs.5 per unit respectively. He has Rs.40 with him, draw the budget line on the basis of above information. Explain the conditions of that need to be satisfied for the consumer to be in equilibrium under IC analysis. (Use diagram).
Since the consumer consumes only 2 goods and spends his entire income on purchasing these two goods, following are the possible bundles of the 2 commodities :
(10X , 0 Y) (0X 8Y) (5X, 4 Y) .Now plot the points on the graph an draw the budget line.
Conditions for consumer equilibrium using IC Analysis:
1) The budget line must be tangent to the Indifference curve
2) The IC should be convex to the origin.
3) The slope of the IC(MRS) = slope of the budget line(Price ratio i.e Px/Py)
The consumer attains equilibrium at a point where he finds a match between the things that he can buy(shown on budget line) and the things / bundles of 2 commodities that give him maximum satisfaction(shown on IC).
(10X , 0 Y) (0X 8Y) (5X, 4 Y) .Now plot the points on the graph an draw the budget line.
Conditions for consumer equilibrium using IC Analysis:
1) The budget line must be tangent to the Indifference curve
2) The IC should be convex to the origin.
3) The slope of the IC(MRS) = slope of the budget line(Price ratio i.e Px/Py)
The consumer attains equilibrium at a point where he finds a match between the things that he can buy(shown on budget line) and the things / bundles of 2 commodities that give him maximum satisfaction(shown on IC).