Question

Consumer and Producer Theory The following figure shows three indifference curves in red and the budget line of a consumer in blue. The x-axis represents the quantity of Good X consumed and the y-axis represents the quantity of Good Y consumed. Identify the correct statement based on this information. 11 2 13 Good Y Qy Qx Good X

While moving from I2 to I3, the quantity of goods in the bundle decreases.

Any point on I1 is more preferred by the consumer than any point on I2

A slight reduction in consumer’s budget would make I2 unaffordable.

The quantities Qx and Qy would remain constant even if the prices of the Good X and Good Y change.

Answer 1

In the given indifference curves, I₁, I₂ and I₃, only the following statement is correct:

A slight reduction in consumer’s budget would make I₂ unaffordable.

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This is because as the budget line will shift to the left, even by a small margin, it will no longer be tangential to the indifference curve. This makes it unaffordable and unattainable.

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Other options:

While moving from I₂ to I₃, the quantity in the bundles increases.

Any point on a higher indifference curve is always more preferred.

If the relative prices change, the quantities will also change.