Question

The following diagram shows three indifference curves and a budget constraint for a consumer: 0 1 2 4 What amount of x will the agent consume?

Answer 1

A budget line shows all combinations of two goods that the consumer can purchase with his limited income. An indifference is a locus of combinations of the two goods which gives equal level of satisfaction , a higher indifference curve gives higher level of satisfaction and a lower indifference curve lower level of satisfaction. A consumer is in equilbrium when the budget line is tanget to the indifference curve. In the given graph the consumer would be in equilibrium when the second indifference curve is tangent to the budget line.

Ans: Amount of X=2.