What does the intersection of Indifference Curve and Budget Line represent?

Both 1 and 2

The correct answer is: Option 3: Both 1 and 2

Here's why:

Indifference Curve: This curve shows all the combinations of two goods that provide a consumer with the same level of satisfaction.

Budget Line: This line represents all the possible combinations of two goods that a consumer can afford given their income and the prices of the goods.

The intersection of these two curves holds significance because it represents the:

Equilibrium point for the consumer: At this point, the consumer is getting the most satisfaction they can from their budget. They cannot move to a higher indifference curve (more satisfaction) because they can't afford it.

Point of maximum satisfaction given the income of the consumer: Since the consumer is on the highest indifference curve reachable with their budget, they are getting the most satisfaction possible with their limited resources.

Therefore, both option 1 and 2 are true.

The equilibrium point of the consumer represents the point of maximum satisfaction of the consumer with the given income. It is determined with the help of indifference curves and budget line. The point where IC is tangent to the budget line is termed as consumer equilibrium point. In the picture point E stands to be the equilibrium point of the consumer.