‘Higher indifference curve represents higher level of satisfaction to the consumer’. Explain the statement, also state the underlying assumption related to this property of indifference curve.

OR

A consumer consumes two goods X and Y. Explain what will happen if $M U_{x} / P_{x}$ is greater than $M U_{y} / P_{y}$

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Solution

Higher indifference curve represents higher level of satisfaction, in other words any combinations that lie on a higher indifference curve i.e. away from origin represents higher level of satisfaction.

Combination B > A

$(O X_{2}, O Y_{1} > O X_{1}, O Y_{1})$

The underlying assumption here is the assumption of monotonic preference which represents that a consumer will prefer a combination which contains more of at least one and no less of the other.

Or

If $M U_{x} / P_{x} > M U_{y} / P_{y}$ then it means that satisfaction of the consumer derives from spending a rupee on Good X greater than the satisfaction derived from spending a rupee on Good Y.

The consumer will reallocate his income by substituting Good X Y. As the consumption of Good X increases the marginal utility derived from it goes on diminishing and reverse proposition occurs for Good Y, this process will continue till $M U_{x} / P_{x}$ becomes equal to $M U_{y} / P_{y} .$

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Similar questions

A consumer, Mr. Aman is in state of equilibrium consuming two goods X and Y. with given prices Px and Py. Explain what will happen if :

a. MUx / Px is greater than MUy / Py.

b. Py falls

a) A consumer, Mr Aman is in state of equilibrium consuming two goods X and Y, with given prices Px and Py . What will happen if $\frac{M U x}{P x} > \frac{M U y}{P y}$ ?

b) Identify which of the following is not true for the Indifference Curves theory. Give valid reasons for choice of your answer:

a. Lower indifference curve represents lower level of satisfaction.
b. Two indifference curves can intersect each other.
c. Indifference curve must be convex to origin at the point of tangency with the budget line at the consumer’s equilibrium.
d. Indifference curves are drawn under the ordinal approach to consumer equilibrium.

A consumer has total money income of Rs 500 to be spent on two goods X and Y with prices of Rs 50 and Rs 10 per unit respectively. On the basis of the given information, answer the following questions:
a. Give the equation of the budget line for the consumer.
b. What is the value of slope of the budget line?
c. How many units can the consumer buy if he is to spend all his money income on good X?
d. How does the budget line change if there is a 50% fall in price of good Y?

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Q. As per Indifference Curve Analysis, to maximise his satisfaction, a Consumer will try to _____

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‘Higher indifference curve represents higher level of satisfaction to the consumer’. Explain the statement, also state the underlying assumption related to this property of indifference curve. OR A consumer consumes two goods X and Y. Explain what will happen if MUx/Px is greater than MUy/Py