Question

1. Define an indifference curve and on a correctly labeled graph explain what the points along the indifference curve represent.
2. Define using the correct mathematical equations for: a) a budget set, and b) a budget line.
3. On correctly labeled graph, show and explain the indifference curves for normal goods X and Y.
4. In two sentences, define a budget line.

Answer 1

An indifference curve:— It graphically shows the different combinations of two goods that give the same level of utility(satisfaction) to the consumer. Each point on the indifference curve shows a combination (bundle) of two goods.

Graph is attached......

a.... A budget set : — It is the combinations (bundles)of two goods that the consumer can buy with his income. PxQx+PyQy$\leq$ M ( pxQx is expenditure on good X and PyQy is expenditure on good Y.M is the incomeof theconsumer) Thus the budget set put constraint on expediture on both the goods and income.

b..... A budget line: It graphically shows the different combinations of the two goods that the consumer can buy with his full income.

Equation of the budget line , PxQx+PyQy=M ( Any combination of two goods on the budget line exhaust consumer's entire income)

* Groddy x1,594 deuren By 15) F-E- 1 2 3 4 5 6 7 8 Crood & - I The points on the indifference curve (IC), A B, C, D, E show equal utility (satisfaction) to the consumer. Sacrifice (MRS) goes on falling so I cis conven. Budget line 1,510) - Lebe † No 40 Fų *13,5) Price Py = 10 Px = 4 ..ME 50 la 15 2 45 Ğ § - Budget equation P. Qx + Py 8y = M So any combination on the budget line line say say A, B, C ord exhaust consumer's full income