Assumptions of Indifference Curve Analysis: (1) The consumer acts rationally so as to maximise satisfaction. (2) There are two goods X and Y. (3) The consumer possesses complete information about the prices of the goods in the market. ADVERTISEMENTS: (4) The prices of the two goods are given.
What is indifference curve discuss its properties?
Definition: An indifference curve is a convex shaped curve depicting the graphical representation of the different combinations deriving the same level of satisfaction to the consumer by considering two commodities. It functions on the principle of the diminishing marginal rate of substitution (MRS).
Can indifference curve be concave?
The indifference curves are usually convex to the origin. But the possibility of indifference curves being concave to the origin cannot be ruled out in some exceptional cases. Concavity of the indifference curves implies that the marginal rate of substitution of X for y increases when more of X is substituted for Y.
What is the meaning of indifference curve?
An indifference curve shows a combination of two goods that give a consumer equal satisfaction and utility thereby making the consumer indifferent. Along the curve, the consumer has an equal preference for the combinations of goods shown—i.e. is indifferent about any combination of goods on the curve.
What happens if indifference curve is concave?
Concavity of the indifference curves implies that the marginal rate of substitution of X for y increases when more of X is substituted for Y. It will be clear from the analysis made below that in case of indifference curves being concave to the origin the consumer will choose or buy only one good.
When would an indifference curve be concave?
Indifference curves can be straight lines if a slope is constant, resulting in an indifference curve represented by a downward-sloping straight line. If the marginal rate of substitution is increasing, the indifference curve will be concave to the origin.
What are the four properties of an indifference curve?
The four properties of indifference curves are: (1) indifference curves can never cross, (2) the farther out an indifference curve lies, the higher the utility it indicates, (3) indifference curves always slope downwards, and (4) indifference curves are convex.
Why is the indifference curve bowed inwards?
This is because people are more willing to trade away goods that they have in abundance and less willing to trade away goods of which they have little. These differences in a consumer’s marginal substitution rates cause his or her indifference curve to bow inward.
Are indifference curves always convex?
Along the curve, the consumer has an equal preference for the combinations of goods shown—i.e. is indifferent about any combination of goods on the curve. Typically, indifference curves are shown convex to the origin, and no two indifference curves ever intersect.
What does it mean if MRS is positive?
Marginal Utility
Formal Definition of Marginal Utility Marginal utility will always be positive when we are dealing with goods (as opposed to bads or neutrals).
What does it mean if MRS is negative?
marginal rate of substitution
The marginal rate of substitution (MRS) is the slope of the indifference curve. For the downward-sloping convex indifference curves which result from well- behaved preferences, the MRS is always negative, and always decreases (becomes greater in absolute value) as the amount of good x decreases.
Why would an indifference curve be concave?
