suppose a customers disposable income is Rs.5000/- per week and she has a choice of spending the income on concerts and meals.Assume meal is available for Rs.250/- each and concerts are available for Rs.500/- each.Prepare a table of possible combinations of meals and concerts that could bought this income.what is your obsevations about the values in the table
Answers
Characteristics
Indifference curve is the locus of the set of all points, representing different possible combinations of two goods, which offer the same level of satisfaction to the consumer.
The most important characteristics of indifference curve (IC) are :
1. IC is downward sloping
2. IC is convex to the point of origin
3. 2 ICs do not touch or intersect each other
4. Higher IC points to higher level of satisfaction
Another very important fact about IC is that the slope of IC points to the Marginal Rate of Substitution.
MRS is the rate at which the consumer is willing to substitute Good Y with an additional unit of Good X.
As IC is convex to the point of origin, this implies that it has decreasing slope, hence MRS is diminishing i.e. the consumer is willing to sacrifice less and less of Good Y to get an additional unit of Good X.
This is due to the Law of Diminishing Marginal Utility. As we increase the consumption of Good X, the intensity of desire for more of Good X tends to decrease. This is because each subsequent unit of Good X will give lesser satisfaction than the previous unit.
At the same time, because we are sacrificing Good Y, the intensity of desire for Good Y will increase. Hence, the consumer will now want to save Good Y, an and will sacrifice lesser of Good Y for Good X.
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Table
As we see from the table, the rate at which the consumer substitutes Good Y for Good X is constant at 1/2 i.e. 0.5.
Therefore the slope of the Budget line is constant here.
(Images of the full table and an indifference curve are attached)
