devarshi-dt-logo

Question:

Explain the conditions of consumer's equilibrium using Indifference Curve Analysis.

Solution:

Consumers equilibrium is the amount of goods the consumer can buy in the market given his/her current level of income. There are two conditions for consumers equilibrium:

  1. The first is that the budget line should tangent to the indifference curve or marginal rate of substitution of good X for Good Y (MRSxy) must be equal to the price ratio . i.e MRSxy= Px/Py

  2. The indifference curve should be convex to the origin at the point of tangency.