question_answer

Explain any three properties of Indifference Curves.

Answer:

Indifference Curve (IC) is a curve that depicts various combinations of two goods that provides a consumer with the same level of satisfaction. The following are the three major properties of an IC.

(i) Indifference curve is downward sloping to the right: Downward slope of an IC to the right implies that a consumer cannot simultaneously have more of both the goods. An increase in the consumption of one good is possible only with the reduced consumption of another good.

(ii) Slope of IC: The slope of an IC is given by the Marginal Rate of Substitution (MRS). It refers to the rate at which a consumer is willing to substitute one good for each additional unit of another good.

At point A:

Slope of IC (MRS) =

i.e., MRS shows the rate at which the consumer is willing to sacrifice good Y for an additional unit of good X.

(iii) Shape of indifference curve: An IC is convex to the origin. As we move down along th e IC to the right, the slope of IC (or MRS) decreases. This is because as the consumer consumes more and more of one good, the marginal utility of that good tails. On the other hand, the marginal utility of the (other) good which is sacrificed rises. In other words, the consumer is willing to sacrifice lesser and lesser for each additional unit of the other good consumed. Thus, as we move down the IC, MRS diminishes. This suggests the convex shape of indifference curve.

At point A,

At point B,

MRS at B < MRS at A, so MRS has fallen.