Explain the conditions of consumer’s equilibrium under indifference

1.	Explain the conditions of consumer’s equilibrium under indifference curve approach.
Answer» Following are two conditions of consumer’s equilibrium under indifference curve analysis: (i) MRS = Ratio of prices – Let the two goods be X and Y. The first condition for consumer’s equilibrium is that MRS = P_x/P_y. Now suppose MRS is greater than P_x/P_y. It means that the consumer is willing to pay more forXthan the price prevailing in the market. As a result, the consumer buys more of X. This leads to fall in MRS. MRS continues to fall till it becomes equal to the ratio of prices and the equilibrium is established. (ii) MRS continuously falls as more of a good is consumed – Unless MRS declines continuously as more and more of good X is consumed, it will not be equal to \(\frac{P_x}{p_y}\) and consumer will not be able to reach the equilibrium.

Explain the conditions of consumer’s equilibrium under indifference curve approach.

Answer»

Following are two conditions of consumer’s equilibrium under indifference curve analysis:

(i) MRS = Ratio of prices – Let the two goods be X and Y. The first condition for consumer’s equilibrium is that MRS = P_x/P_y. Now suppose MRS is greater than P_x/P_y. It means that the consumer is willing to pay more forXthan the price prevailing in the market. As a result, the consumer buys more of X. This leads to fall in MRS. MRS continues to fall till it becomes equal to the ratio of prices and the equilibrium is established.

(ii) MRS continuously falls as more of a good is consumed – Unless MRS declines continuously as more and more of good X is consumed, it will not be equal to \(\frac{P_x}{p_y}\) and consumer will not be able to reach the equilibrium.

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