Question

(d) Draw a graph of the indifference curves of someone who could be influenced by either of two reference points.

(e) Is one of the axioms above violated by those indifference curves? If so, which one?

(f) Explain how those indifference curves violate the axiom you identified, by labeling some points on the indifference curves and indicating the exact violation.

Answer 1

(d) Figure-1 in the document attached illustrates the various consumer preferences for two goods, which are denoted as Good Y and Good X in figure-1. The y and the x axes represent the Good Y and Good X respectively and the curves I1, I2, and I3 denote the three indifference curves in the figure. Based on figure-1, it can be assumed that let point A be the actual consumer preference of Good Y and Good X and points B and C be the reference points from which point A or the actual consumer preference is chosen can be compared. Therefore, in this case, point A can be essentially compared with points B and C respectively.

(e) Now, comparing point A particularly with point C, it is clearly obvious that the overall or total utility or satisfaction obtained by any consumer is relatively higher at I2 in comparison to I3 where point A is located or situated pertaining to the consumer preference or bundle of Good Y and X. Note that referring to point C in I2 curve, any consumer is able to purchase more of both Good Y and X compared to the I3 curve and based on the rational consumer preference or choice, more of any good or product is always better as it provides higher overall or total satisfaction or utility. Hence, any consumer is better off choosing point C to point A.

(f) Thus, considering that the actual consumer preference bundle for both goods is at point A in this case, it violates one of the basic axioms or principles of rational consumer preference or choice that more of any good or product is always better as it enhances the overall or total consumer utility or satisfaction implying that more of any good is always preferred. Thus, in this instance, I2 represents the higher indifference curve compared to I3 thereby indicating higher overall utility or satisfaction, and therefore, the consumer could be better off reaching point C from point A, in this case.