Question

Suppose a person's budget constraint is tangent to their indifference curve. If that person’s income increases and there is no change in the price of two goods, what will happen?

Answer 1

As the persons budget constraint is tangent to the indifference curve the person is maximizing the utility i.e. they are consuming maximum they can at the given income.

If the income increase and the price of the goods are same, they will shift to a higher indifference curve as the present curve will not be the maximum as the increase in in the budget will shift the budget constraint above.

So, the budget constraint will shift above at a higher consumption level and the consumer will be consuming at a higher indifference curve.