Question

Show how a consumer gets maximum satisfaction by purchasing two commodities with a given income.

Answer 1

By choosing the optimum mix of two products, a consumer seeks to maximize their limited income's happiness (utility). The indifference curve analysis can be used to explain this.

Conditions for Maximum Satisfaction (Consumer Equilibrium):

• Budget Line (Price Line): The budget line, often known as the price line, displays each possible pairing of two items that a customer can purchase with their income.
• Indifference Curve: The indifference curve shows several pairings of two products that provide the customer with the same level of satisfaction.
• Equilibrium Condition: When the indifference curve is tangent to the budget line, the consumer has reached equilibrium.
• At this point: `MRS_(XY) = (P_X)/(P_Y) or (MU_X)/(P_X) = (MU_Y)/(P_Y)`

The combination of commodities where the customer receives the same level of happiness per rupee spent on each is shown by the tangency point. Any other point on the budget line results in poorer satisfaction, because the consumer cannot go to a higher indifference curve without going over budget. As a result, this point provides the greatest amount of usefulness given the income.