1) (a) How is equilibrium achieved with the help of Indifference curve and budget line?

Analysis?

 When the budget line and the indifference curve get tangent the consumer equilibrium is
form. The consumer equilibrium refers to the situation in which consumer derives maximum
satisfaction.  To maximize utility, a consumer chooses a combination of two goods at which
an indifference curve is tangent to the budget line. So, equilibrium is established, when
MRSXY = PX/PY.

(b) State essential Conditions for utility maximizing equilibrium?

 The two conditions that must be met to ensure that a consumer is maximizing the utility are:
i) all available income is spent,
ii) the marginal utility per money spent is equal for all goods and services consumed.

2) (a) Define Budget line.

 Budget line is a graphical representation of all possible combinations of two goods
which can be purchased with given income and prices, such that the cost of each of
these combinations is equal to the money income of the consumer.

(b) How dose budget line change if money income increase when other prices remain
constant?

 When there is an increase in money income by keeping the price constant then the
budget line shift upward and stay parallel to the previous budget line.
 (c) What happens to the budget set if both the prices as well as the income double?

 When the prices and the income are doubled, then the budget line will remain

unchanged. Hence, the vertical intercept, the horizontal intercept and the slope of
the budget line will remain the same.

3. (a) Fill in the blank in the following table:

Labour 0 1 2 3 4 5 6 7 8
Output 4 5 8 12 15 17 18 18 17
MP 1 3 4 3 2 1 0 -1
AP 5 4 4 3.4 3.4 3 2.57 2.12

(b) Draw TP, MP and AP.

 TP, MP, AP GRAPH
3.4 3
3.4 2.57
4
3 2 1
18 18
0 2.12
17 17
4 -1
4 15
TP, MP, AP

12
5 3
8
1
5
4
0

1 2 3 4 5 6 7 8 9
QUANTITY OF LABOUR

TP MP AP