Question

The sufficient condition of consumer's equilibrium under indifference curve analysis is:

• A. MRS is decreasing
• B. MRS = PR
• C. MRS $>$ PR
• D. Indifference curve is concave to the origin

Hint:

Exam Tip: In indifference curve analysis, remember:
Necessary Condition: MRS = Price Ratio
Sufficient Condition: MRS is diminishing (Indifference curve is convex to the origin).
The second condition ensures utility is maximized, not minimized.

Answer 1

The Correct Option is A

Step 1: Understanding the Concept:
This question tests the conditions for consumer equilibrium using the Indifference Curve (IC) analysis. Consumer equilibrium is achieved when a consumer maximizes their utility given their budget constraint.

Step 2: Conditions for Consumer Equilibrium:
There are two conditions for consumer equilibrium in IC analysis:

• Necessary Condition (First Order Condition): The slope of the indifference curve (MRS) must be equal to the slope of the budget line (Price Ratio).
\[ \text{MRS}_{XY} = \frac{P_X}{P_Y} \]
• Sufficient Condition (Second Order Condition): The indifference curve must be convex to the origin. This ensures that the point of tangency is a point of maximum utility and not a minimum. A convex IC implies that the MRS is decreasing as we move down the curve.

Step 3: Analyzing the Options:

• (A) MRS is decreasing: This is the sufficient condition. It ensures the equilibrium is a maximum.
• (B) MRS = PR: This is the necessary condition.
• (C) MRS $>$ PR: This would mean the consumer is not in equilibrium. They would be willing to give up more of Good Y than the market requires.
• (D) Indifference curve is concave to the origin: A concave IC (which implies increasing MRS) would lead to a corner solution or a minimum, not a maximum.

Step 4: Final Answer:
The sufficient condition for consumer equilibrium is that the MRS is decreasing (which implies convexity of the indifference curve). Therefore, option (A) is correct.