Income Consumption Curve Straight Line

This may be proved as follows.

Income consumption curve straight line. If now various points q 1 q 2 q 3 and q 4 showing consumer s equilibrium at various levels of income are joined together we will get what is called income consumption curve icc. The cobb douglas utility function is expressed as. The figure first shows that the neutral good is measured on x axis or in our case good x is neutral good. Ab is the initial budget line and the point e 1 is the equilibrium of the consumer on the indifference curve ic 1 at the equilibrium point the consumer has purchased x 1 and y 1 units of good x and y respectively.

Income consumption curve traces out the income effect on the quantity consumed of the goods. Income consumption curve is a graph of combinations of two goods that maximize a consumer s satisfaction at different income levels. It is plotted by connecting the points at which budget line corresponding to each income level touches the relevant highest indifference curve. Straight line income consumption curve.

In fig x axis shows the quantity of rasgulla and y axis shows the quantity of gulab jamun. The income is shown by budget line ab and e is the equilibrium point where the budget line is tangent to an indifference curve. The income consumption curve is the set of tangency points of indifference curves with the various budget constraint lines with prices held constant as income increases shifting the budget constraint out. The income consumption curve icc for cobb douglas production function is a straight line through the origin.

Income consumption curve is thus the locus of equilibrium points at various levels of consumer s income.