- Consumer is rational and tries to maximize his satisfaction.
- Income of the consumer is fixed and given.
- Prices of X and Y are given in the market and consumer cannot change them.
- Units of X and Y are same in quantity and are not divisible.
- Income of consumer is Rs. 20
- Price of commodity X is Rs. 2 and consumer can purchase max. 10 units of X.
- Price of commodity X is Rs. 1 and consumer can purchase max. 20 units of Y.
- Consumer budget line is AB.
- Consumer spends 10 Rs. On purchasing 5 units of X commodity.
- Consumer spends 10 Rs. On purchasing 10 units of Y commodity.
- Consumer’s equilibrium will be on point E where IC2 touches the budget line AB.
Consumer’s equilibrium can be explained by means of the following diagram.
In graph, IC-3 provides a higher satisfaction but it is above budget line AB and is beyond the reach of a consumer. IC-1 is below the budget line AB and is the lowest one, which provides less satisfaction. AC-1 provides more satisfaction. This curve is also tangent on budget line at E, here the consumer will purchase both X and Y goods and will spend all his income and will obtain maximum possible satisfaction and will be in Equilbirum position.
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