What happens when the budget line touches the indifference curve?

The utility-maximizing choice along a budget constraint will be the point of tangency where the budget constraint touches an indifference curve at a single point. A change in the price of any good has two effects: a substitution effect and an income effect.

Why does indifference curve do not intersect?

The indifference curves cannot intersect each other. It is because at the point of tangency, the higher curve will give as much as of the two commodities as is given by the lower indifference curve. Similarly the combinations shows by points B and E on indifference curve IC1 give equal satisfaction top the consumer.

When the slope of the budget line and the indifference curve are equal?

A budget line shows all the various combinations of those two items that you could by with available money. The point on which indifference curve and budget line equal to each other is known as equilibrium point.

What happens to budget line when price changes?

A budget line shows the maximum consumption of a consumer at a given income level. It shifts parallelly when there is a change in income but rotates when the relative prices change. At any point in between these two extreme cases, a combination of Product A and B are consumed.

Why are indifference curves bowed inward?

This is because people are more willing to trade away goods that they have in abundance and less willing to trade away goods of which they have little. These differences in a consumer’s marginal substitution rates cause his or her indifference curve to bow inward.

Why indifference curve is not concave?

Indifference curves are convex to the origin because the increase in utility from an increase of a single unit of any product does not remain the same. This is called a decrease in marginal utility and is the reason why indifference curves are convex.

Why indifference curve Cannot be upward sloping?

4. The slope of an indifference curve is negative, downward sloping, and from left to right. It means that the consumer to be indifferent to all the combinations on an indifference curve must leave less units of good Y in order to have more of good X. Therefore, an indifference curve cannot be vertical either.

What is the implication of budget line in a real life situation?

Karthik, A budget line represents the different combinations of two goods that are affordable and are available to a consumer, while being aware of his/her income-level and market prices of both the goods.