Explain the conditions of consumer’s equilibrium under indifference curve approach.
Conditions of consumer’s equilibrium using indifference curve analysis:
A consumer will strike his equilibrium at the point where the budget line is tangent to an indifference curve. the optimum point is characterised by the following equality :
Slope of IC = Slope of price line
| -dy | = MRS = | -P1 |
| dx | | P2 |
Equality of marginal rate of substitution and ratio of prices: When the budget lines is tangent to an indifference curve at a point, the absolute value of the slope of the indifference curve and of the budget line are equal at that point, i.e. MRS is equal to the price ratio. The slope of the budget line is the rate at which the consumer can substitute one good for the other in the market. At the optimum, the two rates should be the same.
Thus, a point at which the MRS is greater, the price ratio cannot be optimum, and when the MRS is less than the price, the ratio cannot be optimum.
In the diagram, Point E shows the consumer’s equilibrium where the budget line is tangent to the indifference curve. Consumers’ desire to purchase correspond to the consumer originally purchase, i.e. x1*, x2* shows the optimum bundle.
State different phases of the law of variable proportions on the basis of total product. Use diagram.
Or
Explain the geometric method of measuring price elasticity of supply. Use diagram.
The ratio of total deposits that a commercial bank has to keep with Reserve Bank of India is called : (choose the correct alternative)
(a) Statutory liquidity ratio
(b) Deposit ratio
(c) Cash reserve ratio
(d) Legal reserve ratio
Given below is the cost schedule of a product produced by a firm. The market price per unit of the product at all levels of output is Rs. 12. Using marginal cost and marginal revenue approach, find out the level of equilibrium output. Give reasons for your answer :
| output (units) | 1 | 2 | 3 | 4 | 5 | 6 |
| average cost (in RS) | 12 | 11 | 10 | 10 | 10.4 | 11 |
Good Y is a substitute of good X. The price of Y falls. Explain the chain of effects of this change in the market of X.
Or
Explain the chain of effects of excess supply of a good on its equilibrium price.
Aggregate demand can be increased by : (choose the correct alternative)
(a) increasing bank rate
(b) selling government securities by Reserve Bank of India
(c) increasing cash reserve ratio
(d) none of the above
