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Question

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

a. Lower indifference curve represents lower level of satisfaction.

b. Two regular convex to origin 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.

OR

A consumer has total money income of Rs 250 to be spent on two goods X and Y with prices of Rs 25 and Rs 10 per unit respectively. On the basis of the information given, 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 fall in price of good Y?

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Solution

Out of the given options, (B) is incorrect. Indifference Curves have a property that two ICs cannot intersect.
Suppose, there are any two ICs intersecting each other. As per the figure
A =C ( on IC1)
D= E (on IC2)
But if we see the peculiarity of point B (the point of intersection), this would result into absurd situation of A=C=B & D=C=B, which is not possible, as they are violating the basic definition of the Indifference Curves.

OR

(a) PxQx + PyQy = M
25Qx + 10Qy = 250

(b) Slope of Budget Line = ()PxPy=()2510=()2.5

(c) If Qy is to be Zero
25Qx + 10Qy = 250
25Qx + 10(0) = 250
Qx = 250/25 = 10 units

(d) If Py falls the consumer will be able to buy more of good Y in the same money income pushing the Y-intercept of the Budget Line away from origin, keeping the X-intercept constant. (shifts outwards)


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