Indifference curves CANNOT be concave to the origin because: consumers generally
ID: 1114021 • Letter: I
Question
Indifference curves CANNOT be concave to the origin because:
consumers generally will prefer to have more of a good than less of a good.
the satisfaction consumers get from consuming additional units of a good declines.
consumers must give up more of one good to obtain more of another good.
the substitution effect holds across indifference curves.
2. Let MU = marginal utility and P = price. If MU of root beer/P of root beer > MU of candy bars/P of candy bars the consumer:
is maximizing utility.
should spend more on candy bars and less on root beer.
should spend more on root beer and less on candy bars.
is maximizing marginal utility.
consumers generally will prefer to have more of a good than less of a good.
the satisfaction consumers get from consuming additional units of a good declines.
consumers must give up more of one good to obtain more of another good.
the substitution effect holds across indifference curves.
2. Let MU = marginal utility and P = price. If MU of root beer/P of root beer > MU of candy bars/P of candy bars the consumer:
is maximizing utility.
should spend more on candy bars and less on root beer.
should spend more on root beer and less on candy bars.
is maximizing marginal utility.
Explanation / Answer
1.
The Indifference Curves are Convex to the Origin because when the consumer replaces commodity X for commodity Y, the marginal rate of substitution declines as X for Y along an indifference curve. The Slope of the indifference curve is known as the marginal rate of substitution.
Therefore it can be said that the indifference curves CANNOT be concave to the origin because the substitution effect holds across indifference curves.
hence option four is the correct answer and it is the substitution effect holds across indifference curves.
2.
The utility maximisation condition for two goods are ;
MU of good1 / Price of good 1 = MU of good2 / Price of good 2
As it is given that MU = marginal utility and P = price.
If MU of root beer/P of root beer > MU of candy bars/P of candy bars the consumer:
Therefore as it can be seen in the given condition MU of root beer is more, so the consumer should spend more on the root beer becuase as more goods is consumed, the MU of that good decrease and when less of any goods is used, the MU of that goods increases.
Therefore if more money will be spent on the root beer, then the MU of root beer decreases, and MU of candy bar decreases because more units of candy bar is used. This will continue until the following condition are satisfied;
MU of root beer/P of root beer = MU of candy bars/P of candy bars
Hence it can be said that If MU of root beer/P of root beer > MU of candy bars/P of candy bars the consumer should spend more on root beer and less on candy bars.
Hence option third is the correct answer and option third is; should spend more on root beer and less on candy bars.