A budget line shows combinations of two goods a consumer is able to consume, given a budget constraint. An indifference curve shows combinations of two goods that yield equal satisfaction. To maximize utility, a consumer chooses a combination of two goods at which an indifference curve is tangent to the budget line.
What is the relationship between indifference curve and budget line at the best affordable point?
The correct option is C) The slope of the indifference curve equals the slope of the budget line.
What is an indifference curve related to?
In economics, an indifference curve connects points on a graph representing different quantities of two goods, points between which a consumer is indifferent. … In other words, an indifference curve is the locus of various points showing different combinations of two goods providing equal utility to the consumer.
What is the relationship between the slope of the budget line and that of the indifference curve at equilibrium?
Note that the equilibrium quantities are those for which the slope of the indifference curve equals the slope of the budget line—that is, where the marginal rate of substitution equals the price ratio. Now suppose that the level of the individual’s income increases without any change in prices.Is at the point of tangency between the budget line and the indifference curve?
a) The geometric meaning of tangency between an indifference curve and the budget line is that the indifference curve and the budget line are both at the same level at that point of tangency. At this point, the consumer budget (the price he can pay) is equal to the utility provided by a bundle.
What is slope of indifference curve?
The slope of the indifference curve is the marginal rate of substitution (MRS). The MRS is the amount of a good that a consumer is willing to give up for a unit of another good, without any change in utility.
How does the budget line on the indifference map moves of the consumer income increases?
3.12, when a consumer’s income increases, his budget line shifts parallel and upward and when his income decreases the budget line shifts downward. As the income changes, a new equilibrium is established and the consumer moves from one equilibrium point to another.
What is the slope of the budget line?
Note that the slope of the budget line is simply the ratio of the prices, also known as the price ratio. This is the rate at which you can trade one good for the other in the marketplace.Why does indifference curve slope downward?
The indifference curves must slope down from left to right. This means that an indifference curve is negatively sloped. It slopes downward because as the consumer increases the consumption of X commodity, he has to give up certain units of Y commodity in order to maintain the same level of satisfaction.
What is budget line in economics?Budget line definition The budget line is a graphical delineation of all possible combinations of the two commodities that can be bought with provided income and cost so that the price of each of these combinations is equivalent to the monetary earnings of the customer.
Article first time published onWhat determines the slope of budget line?
It is also important to remember that the slope of the budget line is equal to the ratio of the prices of two goods. … Now, the quantity of good Y purchased if whole of the given income M is spent on it is OB. It is thus proved that the slope of the budget line BL is equal to the ratio of prices of two goods.
What is significance of a budget line?
A budget line shows the combinations of two products that a consumer can afford to buy with a given income – using all of their available budget.
Where budget line and indifference curve are tangents that point is consumer's equilibrium because?
Only when the budget line is tangent to an indifference curve, it indicates the highest level of satisfaction that a consumer can attain given his money income and the prices of two commodities. 2. Diminishing marginal rate of substitution ensures that the indifference curve is convex to the origin.
Why indifference curve is convex?
Indifference curves are convex to the origin because as the consumer begins to increase his or her use of one good over another, the curve represents the marginal rate of substitution. … The marginal rate of substitution goes down as the consumer gives up one good for another, so it is convex to the origin.
What is indifference curve map?
An Indifference Map is a set of Indifference Curves. It depicts the complete picture of a consumer’s preferences. The following diagram showing an indifference map consisting of three curves: We know that a consumer is indifferent among the combinations lying on the same indifference curve.
When the indifference curve is tangent to the budget constraint?
The indifference curve is tangent to the budget line when the consumer is maximizing his or her utility.
What is the equation of budget line?
The budget line equation is ‘P1x1 + P2x2 = M‘ presuming two goods are x1and x2 and prices, P1 and P2 respectively. M represents money income.
Why the indifference curve is downward sloping and convex?
Indifference curves slope downwards. The only way an individual can increase consumption in one good without gaining utility is to consume another good and generate the same amount of utility. Therefore, the slope is downwards sloping. Indifference curves assume a convex shape.
What is the shape of indifference curve and why?
Description: Graphically, the indifference curve is drawn as a downward sloping convex to the origin. The graph shows a combination of two goods that the consumer consumes.
Why does indifference curve slopes downward and convex to the origin?
ii Indifference Curve is convex to the origin : Because it is assumed that Marginal Rate of Substitution falls continuously as the consumer moves downwards along the curve. It is due to the Law of Diminishing Marginal Utility.
What is budget line also known as?
The budget line is also known as the Consumption possibility line. The CPF, or consumption–possibility frontier, is the budget constraint where participants in international trade can consume.
What is budget line and budget set?
The budget set or feasible set is the set of goods that the consumer can afford to purchase. The budget line is the pair of goods that exactly spend the budget. The budget line shifts out when income rises and pivots when the price of one good changes.
When we draw an indifference curve?
An indifference curve is drawn on a budget constraint diagram that shows the tradeoffs between two goods. All points along a single indifference curve provide the same level of utility. Higher indifference curves represent higher levels of utility.
How does a consumer attains equilibrium under indifference curve?
The objective of the consumer is to obtain the highest level of utility with the given income he earns. … So, to reach the equilibrium, the consumer tries achieve the balance between his budget and the maximum utility he gets. This happens at the point where the budget curve becomes a tangent to an indifference curve.
How a consumer attains equilibrium under the indifference curve analysis?
According to indifference curve approach, a consumer attains equilibrium under two conditions: (i) When marginal rate of substition is equal to ratio of prices of two goods i.e., MRSxy = Px/Py. … (ii) MRSxy is continuously falling i.e., indifference curve should be convex to the origin.
How a consumer attains equilibrium using indifference curve analysis?
Understanding Consumer’s Equilibrium by Indifference Curve Analysis! … On an indifference map, higher indifference curve represents a higher level of satisfaction than any lower indifference curve. So, a consumer always tries to remain at the highest possible indifference curve, subject to his budget constraint.
Why does Mrs decrease?
Well MRS decline continuously in IC curve because of law of diminishing marginal utility. Means when the consumer consumes more and more of good 1 then his marginal utility from another good keeps on declining and he is willing to give up less and less of good 2 for each good 1. Thats why MRS decline in IC curve.
Is indifference curve convex or concave?
Along the curve, the consumer has an equal preference for the combinations of goods shown—i.e. is indifferent about any combination of goods on the curve. Typically, indifference curves are shown convex to the origin, and no two indifference curves ever intersect.
Can an indifference curve intersect itself?
No, an indifference curve can’t cross itself. All the points on an indifference curve represent the same level of utility by consuming two goods….
