a) A consumer, Mr Aman is in state of equilibrium consuming two goods X and Y, with given prices Px and Py . What will happen if $\frac{M U x}{P x} > \frac{M U y}{P y}$ ?

b) Identify which of the following is not true for the Indifference Curves theory. Give valid reasons for choice of your answer:

a. Lower indifference curve represents lower level of satisfaction.
b. Two indifference curves can intersect each other.
c. Indifference curve must be convex to origin at the point of tangency with the budget line at the consumer’s equilibrium.
d. Indifference curves are drawn under the ordinal approach to consumer equilibrium.

OR

A consumer has total money income of Rs 500 to be spent on two goods X and Y with prices of Rs 50 and Rs 10 per unit respectively. On the basis of the given information, answer the following questions:
a. Give the equation of the budget line for the consumer.
b. What is the value of slope of the budget line?
c. How many units can the consumer buy if he is to spend all his money income on good X?
d. How does the budget line change if there is a 50% fall in price of good Y?

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Solution

(a) If $\frac{M U x}{P x} > \frac{M U y}{P y}$ , then it means that satisfaction derived from consumption of good X is greater than the satisfaction derived from consumption of Good Y.
Mr Aman will reallocate his income by spending more on good X. Utility derived from X goes on diminishing and reverse preposition occurs for Good Y, this process will continue till $\frac{M U x}{P x}$ becomes equal to $\frac{M U y}{P y}$

(b) The second statement ‘ Two regular convex to origin indifference curves can intersect each other' is not true as the intersection of two regular indifference curves indicate one such point (point of intersection) which yields the similar satisfaction of two different
indifference curves which is not possible. In the figure there are two indifference curves IC1 and IC2 intersecting each other, there is clear violation of assumption of monotonic preference.
As per figure satisfaction derived at point A = satisfaction derived at point C ( on IC1) And satisfaction derived at point D = satisfaction derived at point E ( on IC2)

At intersecting point B;

Satisfaction derived by consumer at points A, C and B is equal and
A = C = B (On IC1)
D = E = B (On IC2)
Consequently A = D (which is absurd)
Thus we can say that IC’s can’t intersect each other.

OR

a) $P_{x} Q_{x} + P_{y} Q_{y} = M$

$50 Q_{x} + 10 Q_{y} = 500$

b) Slope of Budget Line $= (-) \frac{P_{x}}{P_{y}} = (-) \frac{50}{10} = (-) 5$

c) If Qy = Zero, then

50Qx + 10Qy = 500

50Qx + 10(0) = 500

d) $Q_{x} = \frac{500}{50} = 10 u n i t s$

Old Py = Rs 10

New Py = Rs 5

(50% of Rs 10 = Rs 5)

If Py falls the consumer will be able to buy more of good Y in the same money income pushing the Y-intercept of the Budget Line away from origin, keeping the X-intercept constant, it rotates outwards and the equation will be 50Qx +5Qy = 500.

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Similar questions

Identify which of the following is not true for the Indifference Curves. Give valid reasons for choice of your answer:

a. Lower indifference curve represents lower level of satisfaction.

b. Two regular convex to origin indifference curves can intersect each other.

c. Indifference curve must be convex to origin at the point of tangency with the budget line at the consumer’s equilibrium.

d. Indifference curves are drawn under the ordinal approach to consumer equilibrium.

A consumer has total money income of Rs 250 to be spent on two goods X and Y with prices of Rs 25 and Rs 10 per unit respectively. On the basis of the information given, answer the following questions:

a. Give the equation of the budget line for the consumer.

b. What is the value of slope of the budget line?

c. How many units can the consumer buy if he is to spend all his money income on good X?

d. How does the budget line change if there is a fall in price of good Y?

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A consumer consumes only two goods. For the consumer to be in equilibrium why must Marginal Rate of Substitution between the two goods must be equal to the ratio of prices of these two goods? Is it enough to ensure equilibrium?

A consumer consumes only two goods. Why is the consumer said to be in equilibrium when he buys only that combination of the two goods which lies at that point on the Indifference curve where the budget line is tangent to the indifference curve? Explain. Use diagram.

A consumer wants to consume two goods. The prices of the two goods are Rs 4 and Rs 5 respectively. The consumer’s income is Rs 20.

(i) Write down the equation of the budget line.

(ii) How much of good 1 can the consumer consume if he/she spends his/her entire income on that good?

(iii) How much of good 2 can be consumed if he/she spends his/her entire income on that good?

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