Question

Q 7

(a) What are indifference curves?

(b) State and explain the properties of indifference curves.

(c) Explain what factors could cause shift in the budget line.

Answer 1

a)Indifference curve( IC) is a curve showing combination of two goods that give equal satisfaction to the consumer. That mean indifference curve shows the various combinations of goods among which the consumer is indifferent.

b)The various properties of an indifference curve are as follows:

1.An indifference curve is convex to the origin.

It is convex to the origin because of the negative slope of the curve.

2.Higher the indifference curve higher will be the satisfaction.

Each indifference curve show a certain level of satisfaction. And a point on higher IC will yield more satisfaction than a point on a lower IC.

3.The curve has a negative slope.

Marginal rate of substitution is the quantity of one good the consumer is willing to sacrifice for an additional unit of the other good.But each time the consumer's willingness to sacrifice one good for the other will go on decreasing as he is indifferent among both the goods.Hence the slope or marginal rate of substitution is negative.

4.Indifference curves do not intersect each other.

Since each indifference curve depict a certain level of satisfaction from the combination of two goods they do not intersect each other.

c) Factor causing shift in budget line is the change in income of the consumer.If the consumer's income increases and the prices of the goods remain the same he will be able to consume more of the goods.This will shift the budget line to the right.Hence the consumer moves to a higher IC that is higher satisfaction. Similarly if the income fall budget line will shift to the left.

Another factor leading to budget line shift is change in price of goods.let the goods be commodity x taken along x axis  and commodity y taken along y axis.when price commodity x increase the budget line shift from BL to BL' and when the price falls it shift from BL to BL''.It is shown in the figure below;

Similarly if price of good y increase budget line shift from LB to LB^'' and if the price of commodity y fall then it shift to LB' from LB.It is shown in the figure below;