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A consumer is in equilibrium at point A in the accompanying figure. The price of good X is $5.  At point A, how many units of good X does the consumer purchase? Suppose the budget line changes so that the consumer achieves a new equilibrium at point B. What change in the economic environment led to this new equilibrium? Is the consumer positively or negatively affected by the price change?

A consumer is in equilibrium at point A in the accompanying figure. The price of good X is $5.  At point A, how many units of good X does the consumer purchase? Suppose the budget line changes so that the consumer achieves a new equilibrium at point B. What change in the economic environment led to this new equilibrium? Is the consumer positively or negatively affected by the price change?

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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A consumer is in equilibrium at point A in the accompanying figure. The price of good X is $5. 

  • At point A, how many units of good X does the consumer purchase?
  • Suppose the budget line changes so that the consumer achieves a new equilibrium at point B. What change in the economic environment led to this new equilibrium? Is the consumer positively or negatively affected by the price change?
### Indifference Curve Analysis The graph above is an illustrative example used in microeconomics to represent indifference curve analysis for two products, Product X and Product Y. This kind of analysis helps understand consumer preferences and the substitution effect between two goods. #### Components of the Graph: 1. **Axes:** - The horizontal axis (X-axis) represents the quantity of **Product X**. - The vertical axis (Y-axis) represents the quantity of **Product Y**. 2. **Indifference Curves:** - There are two indifference curves shown in the graph. These curves demonstrate combinations of Products X and Y that provide the consumer with the same level of satisfaction. - The curve that appears higher and more to the right indicates a higher level of satisfaction or utility compared to the lower curve. 3. **Points on the Indifference Curves:** - Point **A** is located on the lower indifference curve, showing a combination where the consumer consumes more of Product X and less of Product Y. - Point **B** is located on the higher indifference curve, where the consumer is obtaining more utility with a higher quantity of Product Y and less of Product X. - Each point on the same indifference curve implies equal utility to the consumer. Thus, the consumer is indifferent to any combination of goods along that curve. 4. **Budget Line:** - The straight blue lines represent budget constraints. The slope of the budget line reflects the prices of the two goods. The budget line shows all possible combinations of two products a consumer can purchase with their income. - As the budget line shifts, it indicates a change in income or prices of the products. 5. **Interactions and Tangency:** - Points **A** and **B** mark where the indifference curves are tangent to the budget lines. At these points, the consumer maximizes their utility given their budget constraints. #### Key Takeaways: - **Higher Indifference Curves:** Indicate a higher utility level. - **Tangency Points (A and B):** Show optimal consumption bundles where the consumer achieves the highest total utility for their budget. - **Budget Lines:** Reflect changes in income or prices of products. A parallel shift indicates changes in income, whereas a change in the slope indicates a change in relative prices. By studying this graph and understanding the interactions between indifference curves and budget constraints, students can gain deep insights into consumer behavior,
Transcribed Image Text:### Indifference Curve Analysis The graph above is an illustrative example used in microeconomics to represent indifference curve analysis for two products, Product X and Product Y. This kind of analysis helps understand consumer preferences and the substitution effect between two goods. #### Components of the Graph: 1. **Axes:** - The horizontal axis (X-axis) represents the quantity of **Product X**. - The vertical axis (Y-axis) represents the quantity of **Product Y**. 2. **Indifference Curves:** - There are two indifference curves shown in the graph. These curves demonstrate combinations of Products X and Y that provide the consumer with the same level of satisfaction. - The curve that appears higher and more to the right indicates a higher level of satisfaction or utility compared to the lower curve. 3. **Points on the Indifference Curves:** - Point **A** is located on the lower indifference curve, showing a combination where the consumer consumes more of Product X and less of Product Y. - Point **B** is located on the higher indifference curve, where the consumer is obtaining more utility with a higher quantity of Product Y and less of Product X. - Each point on the same indifference curve implies equal utility to the consumer. Thus, the consumer is indifferent to any combination of goods along that curve. 4. **Budget Line:** - The straight blue lines represent budget constraints. The slope of the budget line reflects the prices of the two goods. The budget line shows all possible combinations of two products a consumer can purchase with their income. - As the budget line shifts, it indicates a change in income or prices of the products. 5. **Interactions and Tangency:** - Points **A** and **B** mark where the indifference curves are tangent to the budget lines. At these points, the consumer maximizes their utility given their budget constraints. #### Key Takeaways: - **Higher Indifference Curves:** Indicate a higher utility level. - **Tangency Points (A and B):** Show optimal consumption bundles where the consumer achieves the highest total utility for their budget. - **Budget Lines:** Reflect changes in income or prices of products. A parallel shift indicates changes in income, whereas a change in the slope indicates a change in relative prices. By studying this graph and understanding the interactions between indifference curves and budget constraints, students can gain deep insights into consumer behavior,
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