Question

Given the diagram

(a) Identify: 

(i) AB 

(ii) Point E 

(b) Elaborate the properties of indifference curve. 

(c) Point ‘C’ is not the equilibrium of the consumer, do you agree? Explain.

Answer 1

(a) (i) AB is the Budget line 

(ii) Point E is the equilibrium point

(b) Properties of indifference curves are:

Indifferences curves are negatively sloped. Indifference curves are convex to origin. Higher and higher indifference curve represents higher level of satisfaction. Two indifference curves never intersect each other.

(c) I agree. Equilibrium point is reached by satisfying the following conductions.

(1) IC must be tangent with budget line. 

(2) Slope of IC must be equal to slope of budget line.

These two conditions are satisfied at the point E. Hence ‘C’ is not the equilibrium point.