Question

List and briefly explain each of the four properties of indifference curves. Provide an example where you have made a buying decision based on one or more of these properties. Justify your answer.

Answer 1

THE FOUR MAIN PROPERTIES OF INDIFFERENCE CURVE ARE THE FOLLOWING.

1) INDIFFERENCE CURVES DO NOT INTERSECT EACH OTHER

IF TWO INDIFFERENCE CURVES INTERSECT EACH OTHER, THEN TWO POINTS ON THE TWO INDIFFERENCE CURVE WILL GIVE EQUAL SATISFACTION. THIS IS CLEARLY WRONG.

2) INDIFFERENCE CURVES ARE CONVEX TO THE ORIGIN

INDIFFERENCE CURVES ARE CONVEX TO THE ORIGIN. THIS CONVEXITY IS DUE TO THE DIMINISHING MARGINAL RATE OF TECHNICAL SUBSTITUTION.

3) HIGHER INDIFFERENCE CURVES REPRESENT HIGHER LEVELS OF SATISFACTION

A COLLECTION OF INDIFFERENCE CURVES IS KNOWN AS INDIFFERENCE MAP. IN AN INDIFFERENCE MAP , HIGHER INDIFERENCE CURVES REPRESENT HIGHER LEVELS OF SATISFACTION SINCE THEY REPRESENT LARGER BUNDLES OF BOTH GOODS.

4) INDIFFERENCE CURVES CAN NEVER TOUCH EACH OTHER

TWO INDIFFERENCE CURVES CAN NEVER TOUCH EACH OTHER. BECAUSE IF THEY DO, TWO POINTS IN THE TWO INDIFFERENCE CURVES WILL GIVE SAME LEVEL OF SATISFACTION. THIS IS CLEARLY WRONG.

         HERE WE ARE DISCUSSING A SITUATION IN WHICH THE THIRD ABOVE MENTIONED PROPERTY IS INVOLVED

THERE ARE THREE INDIFFERENCE CURVES VIZ, IC_1,IC_2,IC_3.

I WILL CHOOSE IC₂ WHICH IS THE HIGHEST INDIFFERENCE CURVE I CAN REACH WITH MY INCOME(BUDGET LINE). WE CAN ONLY SELECT THE HIGHEST INDIFFERENCE CURVE AFFORDABLE WITH OUR INCOME.THIS IS SHOWN BELOW.

   WE CAN SELECT POINT F WHICH IS IN THE BUDGET LINE BL. BUT THIS WILL GIVE ONLY LOW LEVEL OF SATISFACTION AS IT LIES IN THE LOWER INDIFFERENCE CURVE.WE CANNOT SELECT POINT G WHICH REPRESENTS HIGHER BUNDLES AND HIGHER LEVEL OF SATISFACTION . IT IS BEYOND THE BUDGET INCOME. SO WE SELECT A POINT ON IC_2.   IT IS THE HIGHEST INDIFFERENCE CURVE THAT CAN BE REACHED WITH AVAILABLE INCOME.