how would a consumer react to the situation when the slope of indifference curve is greater than the slope of budget line ?
A consumer attains equilibrium at the point where the budget line is tangent to the indifference curve . This optimum point is characterised by the following equality.
Slope of theIC = Slope of the budget line
Absolute value of the slope of the IC= Absolute value of the slope of the budget line
Graphically, the equilibrium can be depicted as follows.
In the figure given above, point E depicts consumer equilibrium. At this point, the budget line is tangent to the indifference curve. Observe that at this point the consumer's willingness to purchase (as given by the indifference curve) coincides with what the consumer can actually purchase (as given by the budget line). The optimum bundle is denoted by (x1*, x2*). This point is the optimum or the best possible point.
It should be noted that all other points lying on the budget line (such as point B and point C) are inferior to (x1*, x2*) as they lie on a lower IC. Thus, the consumer can rearrange his consumption and again reach equilibrium where the marginal rate of substitution is equal to the price ratio.
For example, at point B, MRS is greater than the price ratio (i.e.). In this case, the consumer would tend to
move towards point E by giving up some amount of good 2 to increase the consumption of good 1.
Similarly, at point C, MRS is less than price ratio (i.e.). In this case the consumer would tend to move towards point E by giving up some amount of good 1 to increase the consumption of good 2.