Question

1. In words, what information is contained in the slope of an indifference curve? Why are these curves typically convex to the origin? Write a maximum of 4 sentences.

2. If Joe views one candy bar and two pieces of cake as perfect substitutes, what is his marginal rate of substitution between candy bars and cake? Draw the graph and also calculate Joe’s MRS. Assume candy bars are on the x-axis.

Answer 1

1) Indifference curve represents the various combinations of goods X and Y that the consumer prefers. Higher the indifference curve , better off would be the consumer.

The slope of indifference curve  is called the marginal rate of substitution , It states that as the quantity of X increases relative to the quantity of Y, the slope of indifference curve decreases.

The convexity of indifference curve is due to the diminishing marginal rate of substitution ie as we are willing to give up less of good Y for one additional unit of X.

2) Joe views one candy bar and two pieces of cake as perfect substitutes. So he can consume either one candy bar or 2 cakes, both of which give equal utility to him. Marginal rate of substitution is the the slope of indifference curve which implies the rate at which the consumer substitutes one good for another keeping the utility constant. MRS is constant for perfect substitutes.

MRS = change in Y/ change in X= change in cake/ change in candy = 2/1= (-)2.

{ the negative sign because the slope is downward)

The change would always be the same because the goods are perfect substitutes.

(you can comment for doubts )