Description: Graphically, the indifference curve is drawn as a downward sloping convex to the origin. The graph shows a combination of two goods that the consumer consumes. The above diagram shows the U indifference curve showing bundles of goods A and B.
What is the shape of indifference curve in case of perfect substitutes?
Indifference curves are linear if the individual regards the two goods as perfect substitutes. They are L-shaped if the individual regards the two goods as perfect complements.
What does a concave indifference curve mean?
Concavity of the indifference curves implies that the marginal rate of substitution of X for y increases when more of X is substituted for Y. It will be clear from the analysis made below that in case of indifference curves being concave to the origin the consumer will choose or buy only one good.
What are indifference curves in economics?
An indifference curve shows a combination of two goods that give a consumer equal satisfaction and utility thereby making the consumer indifferent. Along the curve, the consumer has an equal preference for the combinations of goods shown—i.e. is indifferent about any combination of goods on the curve.
What are perfect substitutes?
A perfect substitute can be used in exactly the same way as the good or service it replaces. This is where the utility of the product or service is pretty much identical. For example, a one-dollar bill is a perfect substitute for another dollar bill.
What is budget line and indifference curve?
A budget line shows combinations of two goods a consumer is able to consume, given a budget constraint. An indifference curve shows combinations of two goods that yield equal satisfaction. To maximize utility, a consumer chooses a combination of two goods at which an indifference curve is tangent to the budget line.
Can indifference curves be concave?
Indifference curves can be straight lines if a slope is constant, resulting in an indifference curve represented by a downward-sloping straight line. If the marginal rate of substitution is increasing, the indifference curve will be concave to the origin.
Is Mrs positive or negative?
The marginal rate of substitution (MRS) is the slope of the indifference curve. For the downward-sloping convex indifference curves which result from well- behaved preferences, the MRS is always negative, and always decreases (becomes greater in absolute value) as the amount of good x decreases.
Which is the shape of the indifference curve?
Indifference curve is convex to the origin. The marginal rate of substitution is the amount of one good (i.e. Good A) that has to be given up if the consumer is to obtain one extra unit of the other good (Good B). MRS = -6 / 2 = -3 = 3 (Note, the convention is to ignore the sign). · The shape of the indifference curve is not a straight line.
Why is the indifference curve of complementary goods L shaped?
An indifference curve is the curve at every point of which the utility would remain same. The indifference curve of perfect complementary goods is ‘L’ shaped. ‘Left shoe’ and ‘Right shoe’ can be considered as perfect complimentary goods.
What does indifference mean on a simple graph?
The indifference curve analysis work on a simple graph having two-dimensional. Each individual axis indicates a single type of economic goods. If the graph is on the curve or line, then it means that the consumer has no preference for any goods, because all the good has the same level of satisfaction or utility to the consumer.
How are indifference curves used in microeconomics?
Such a graph is a self-serving device prominently used in microeconomics to explain consumer preferences and budget constraints. Besides these, the other applications of indifference curves include welfare economics and the marginal utility theory.
