Suppose that, from an initial consumer equilibrium position, the price of good X falls while the price of good Y remains the same. Using indifference curve analysis, explain how and why the consumer's relative consumption of the two goods will change.
Consumer Behavior: Indifference Curve Analysis
An indifference curve is the locus of various combinations of two commodities at which a consumer is indifferent or each of which gives him a same level of satisfaction. Indifference curve analysis is an approach of theory of consumer behavior. It provided a more general theorem of demand based on several assumptions such ordinal measurement of customer satisfaction, consistency and transitivity in preferences, division of goods into smaller units, rationality of the consumer, diminishing MRS, etc.
The consumer attains equilibrium at the point where he would maximize his satisfaction. The conditions for consumer equilibrium are as follows:
? At equilibrium point price line should be tangent to the ...
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