### Q-1

Let \( MU_x = 20 \), \( P_x = 4 \), \( MU_y = 25 \), \( P_y = 5 \), and \( MU_m = 5 \).

To check if the consumer is in equilibrium, we use the condition for consumer equilibrium:

\[

\frac{MU_x}{P_x} = \frac{MU_y}{P_y} = MU_m

\]

Let's calculate:

\[

\frac{MU_x}{P_x} = \frac{20}{4} = 5

\]

\[

\frac{MU_y}{P_y} = \frac{25}{5} = 5

\]

Since both \(\frac{MU_x}{P_x} = 5\) and \(\frac{MU_y}{P_y} = 5\) are equal to \( MU_m = 5 \), the
consumer **is in equilibrium**.

### Q-2

The price of ice cream is \( P = 20 \), and Priya's marginal utility of money is \( MU_m = 4 \).

To decide whether Priya should consume more ice cream, we check if the marginal utility per rupee
spent on ice cream equals her marginal utility of money:

\[

\frac{MU_{icecream}}{P_{icecream}} = MU_m

\]

Since we don't know the marginal utility of the 5th ice cream, we assume the marginal utility of the
4th ice cream is \( MU = 4 \times 20 = 80 \) because \( MU_m = 4 \). If the marginal utility from
further consumption of ice cream falls below this, she should stop.
Without explicit information about the marginal utility of the 5th ice cream, Priya should **stop
consuming** if the MU of the next unit is less than 80.

### Q-3

**Disagree**. Once a consumer reaches equilibrium, they achieve the best allocation of their
resources given current prices. If the price of one commodity changes, the consumer will **adjust
their allocation** to restore equilibrium. Changes in prices affect the marginal utility per rupee, and
consumers will substitute the cheaper good for the more expensive one to maximize utility.

### Q-4

The relation between **total utility (TU)** and **marginal utility (MU)** is as follows:

- **Marginal utility** is the change in total utility due to the consumption of an additional unit of a
commodity.

- As more units are consumed, total utility increases at a decreasing rate because of diminishing
marginal utility.

- When marginal utility becomes zero, total utility reaches its maximum.

- When marginal utility becomes negative, total utility decreases.

### Q-5

A consumer’s budget is \( 40 \), and the prices of Good-1 and Good-2 are \( 8 \) and \( 10 \) per unit,
respectively.

The **budget line equation** is:

\[

8Q_1 + 10Q_2 = 40

\]

To draw the budget line:

- When \( Q_1 = 0 \), \( Q_2 = \frac{40}{10} = 4 \).

- When \( Q_2 = 0 \), \( Q_1 = \frac{40}{8} = 5 \).

These points, \( (5, 0) \) and \( (0, 4) \), can be used to draw the budget line.
### Q-6

If the rate at which I am willing to substitute Good-X for Good-Y (the marginal rate of substitution) is
lower than the rate allowed by the market (i.e., the price ratio of X and Y), it means that the market
price of X is relatively lower than I value it. As a consumer, I would consume **more of Good-X**
and **less of Good-Y** to maximize my utility.

### Q-7

**Four features of an indifference curve (IC):**

1. **Convex to the origin:** Due to the diminishing marginal rate of substitution (MRS), the IC is
convex, meaning consumers are willing to give up fewer units of one good to get an additional unit of
the other.

2. **Downward sloping:** To maintain the same level of utility, as the quantity of one good
increases, the quantity of the other good must decrease, resulting in a downward slope.

3. **Higher ICs represent higher utility:** Any indifference curve that lies further from the origin
represents a higher level of utility because it indicates higher consumption of both goods.

4. **Indifference curves never intersect:** Each IC represents a different utility level, and if two ICs
intersected, it would imply contradictory preferences, which is impossible.

### Q-1: **Attainable (or feasible) vs. Non-attainable (or non-feasible) Combinations**

- **Attainable (or feasible) combinations:** These are the combinations of two goods that the
consumer can purchase given their income and the prices of the goods. These combinations lie **on
or inside** the budget line, indicating they are within the consumer’s budget.

- **Non-attainable (or non-feasible) combinations:** These are the combinations that the consumer
cannot afford given their income and prices. They lie **outside** the budget line, representing
combinations that exceed the consumer’s budget.

#### Diagram:

In the diagram, the x-axis represents Good-1, and the y-axis represents Good-2. The budget line
shows the limit of the consumer's purchasing power. Any point inside or on the budget line is
attainable, while points outside are non-attainable.

```

Good-2

|
|

| Non-attainable

| O--------- (Outside the line)

| /

| / Attainable (Inside or on the line)

| /

| /

| O---------------------------→ Good-1

```

### Q-2: **Consumer wants to consume two goods**

The prices of Good-1 and Good-2 are ₹4 and ₹5, respectively, and the consumer's income is ₹20.

(i) **Equation of the budget line:**

The budget line represents the total spending on two goods:

\[

4Q_1 + 5Q_2 = 20

\]

where \( Q_1 \) is the quantity of Good-1 and \( Q_2 \) is the quantity of Good-2.

(ii) **How much of Good-1 can the consumer consume if she spends her entire income on that
good?**

\[

Q_1 = \frac{20}{4} = 5

\]

The consumer can buy 5 units of Good-1.

(iii) **How much of Good-2 can she consume if she spends her entire income on that good?**

\[
Q_2 = \frac{20}{5} = 4

\]

The consumer can buy 4 units of Good-2.

(iv) **What is the slope of the budget line?**

The slope of the budget line is the **negative price ratio** of the two goods:

\[

\text{slope} = -\frac{P_1}{P_2} = -\frac{4}{5}

\]

### Q-3: **Consumer Equilibrium with One Commodity**

A consumer reaches equilibrium when the marginal utility per rupee spent on the commodity equals
the marginal utility of money (i.e., the marginal utility of the commodity divided by its price is equal
to the marginal utility of money).

#### Marginal Utility Schedule:

| Quantity (Q) | Marginal Utility (MU) | MU per rupee (MU/P) |

|--------------|-----------------------|---------------------|

|1 | 20 |5 |

|2 | 15 | 3.75 |

|3 | 10 | 2.5 |

|4 |5 | 1.25 |

- If the marginal utility per rupee of the commodity equals the marginal utility of money, say \
( MU_m = 5 \), then the consumer will stop consuming after the 1st unit, as it satisfies \( \frac{MU}
{P} = MU_m \).

### Q-4: **Change in Consumer's Equilibrium Equation with Two Commodities**

When a consumer spends on two goods, the condition for equilibrium changes. For two goods \( X \)
and \( Y \), the consumer reaches equilibrium when:
\[

\frac{MU_x}{P_x} = \frac{MU_y}{P_y} = MU_m

\]

The consumer will allocate income in such a way that the marginal utility per rupee spent on both
goods is equal to the marginal utility of money. This is an extension of the one-commodity
equilibrium condition to two goods.

### Q-5: **Why Should the Consumer's Equilibrium Be Located on the Budget Line?**

The consumer’s equilibrium must lie on the budget line because:

- The budget line represents all possible combinations of goods the consumer can afford given their
income.

- If the consumer’s consumption bundle lies **inside** the budget line, they are not fully utilizing
their income and can achieve a higher utility by moving to a point on the budget line.

- If the consumption bundle lies **outside** the budget line, it is not affordable, making it
unattainable.

Therefore, the consumer achieves equilibrium on the budget line by maximizing utility within their
budget constraints.

### Q-6: **Difference Between Budget Line and Budget Set, and Changes in Budget Line**

- **Budget Line:** It represents all the combinations of two goods that the consumer can buy by
spending their entire income. It shows the boundary of the budget set.

- **Budget Set:** It includes all possible combinations of two goods that the consumer can
purchase, considering their income. These combinations are **on or inside** the budget line.

#### Changes in the Budget Line:

- **Income Change:** If the consumer’s income increases, the budget line shifts outward, indicating
they can buy more of both goods. If income decreases, the budget line shifts inward.

- **Price Change:** If the price of one good changes while the other remains constant, the slope of
the budget line changes. A decrease in the price of one good will rotate the budget line outward on
the axis of that good, and an increase will rotate it inward.
### Q-1: **Consumer's Equilibrium with Utility Approach**

In the utility approach, a consumer's equilibrium is the point where they maximize their total utility
given their income and the prices of goods. The consumer allocates income in such a way that the
**marginal utility per rupee spent** on each good is equal.

#### Conditions for Equilibrium:

For two goods \(X\) and \(Y\), equilibrium is achieved when:

\[

\frac{MU_x}{P_x} = \frac{MU_y}{P_y} = MU_m

\]

Where:

- \( MU_x \) and \( MU_y \) are the marginal utilities of goods \(X\) and \(Y\), respectively.

- \( P_x \) and \( P_y \) are the prices of goods \(X\) and \(Y\).

- \( MU_m \) is the marginal utility of money, representing the additional utility gained from
spending one more rupee.

#### Explanation:

- The consumer allocates their budget so that the **last rupee spent** on each good provides the
**same amount of marginal utility**.

- If \( \frac{MU_x}{P_x} > \frac{MU_y}{P_y} \), the consumer should consume more of Good-X and
less of Good-Y, as they get more utility per rupee spent on \(X\).

- If \( \frac{MU_y}{P_y} > \frac{MU_x}{P_x} \), the consumer should consume more of Good-Y and
less of Good-X.

At equilibrium, no further reallocation can increase utility.

### Q-2: **Conditions of Consumer's Equilibrium with Marginal Utility Analysis**

In marginal utility analysis, the consumer's equilibrium is the point at which the consumer maximizes
utility by equalizing the marginal utility per rupee spent on each good.

#### Conditions for Equilibrium:

\[

\frac{MU_x}{P_x} = \frac{MU_y}{P_y} = MU_m

\]

This means that the consumer derives the same level of satisfaction from the last unit of money
spent on each good.

2. **Exhaustion of Income:**

The consumer should spend their entire budget:

\[

P_x \cdot Q_x + P_y \cdot Q_y = \text{Income}

\]

#### Explanation with Marginal Utility Schedule:

The consumer adjusts the quantities of goods purchased to equalize the marginal utility per rupee
spent. For example:

| Quantity | \(MU_x\) | \(MU_x / P_x\) | \(MU_y\) | \(MU_y / P_y\) |

|----------|----------|----------------|----------|----------------|

|1 | 20 |5 | 25 |5 |

|2 | 15 | 3.75 | 15 |3 |

In this case, equilibrium is at \( Q_x = 1 \) and \( Q_y = 1 \) because the marginal utility per rupee is
equal.

### Q-3: **Consumer's Equilibrium and Indifference Curve Analysis**

**Consumer's equilibrium** refers to the point where the consumer maximizes their utility given
their budget constraint and the prices of goods. In indifference curve analysis, equilibrium occurs
when the consumer reaches the highest possible indifference curve given their budget.

#### Explanation:
- The consumer's objective is to maximize utility by choosing a combination of goods that places
them on the highest attainable indifference curve.

- The **budget line** represents the combinations of goods the consumer can afford.

- The **indifference curve** represents the combinations of goods that provide the consumer with
the same level of satisfaction.

#### Conditions for Equilibrium:

1. **Tangency Condition:**

The budget line must be tangent to the highest possible indifference curve:

\[

\frac{P_x}{P_y} = \frac{MU_x}{MU_y}

\]

This implies that the **marginal rate of substitution (MRS)** between the two goods (the rate at
which the consumer is willing to trade one good for another) is equal to the **price ratio**.

2. **Budget Constraint:**

The consumer must spend all their income:

\[

P_x \cdot Q_x + P_y \cdot Q_y = \text{Income}

\]

#### Diagram:

In the diagram, the budget line is tangent to the highest indifference curve, which signifies the point
of equilibrium.

```

Good-2

| IC2

| \

| \ IC1

| \ IC0
| \_________ O--------------------------→ Good-1

Budget Line

```

### Q-4: **Consumer's Reaction to Changes in Price Ratio and Marginal Rate of Substitution**

(i) **Price Ratio is Higher than the Marginal Rate of Substitution (MRS):**

If the price ratio \( \frac{P_x}{P_y} \) is higher than the MRS \( \frac{MU_x}{MU_y} \), it means that
the market is asking for a higher price of Good-X relative to Good-Y than the consumer is willing to
pay in terms of utility.

- The consumer would **reduce the consumption of Good-X** and **increase the consumption of
Good-Y** because the utility gained from an additional unit of Good-X is less compared to Good-Y at
the given price.

(ii) **Price Ratio is Lower than the Marginal Rate of Substitution (MRS):**

If the price ratio \( \frac{P_x}{P_y} \) is lower than the MRS \( \frac{MU_x}{MU_y} \), it means the
market price of Good-X is relatively lower than what the consumer is willing to substitute for it in
terms of utility.

- The consumer would **increase the consumption of Good-X** and **reduce the consumption of
Good-Y** because the utility gained from an additional unit of Good-X is higher compared to Good-Y
at the given price.