Please help me to solve this question. 010. (4) What is an Indifference Curve? W
ID: 2801462 • Letter: P
Question
Please help me to solve this question.
010. (4) What is an Indifference Curve? What are the assumptions and properties of Indifference curves? (B) The cash flow details of a public project is as follows Initial cost Rs.21000000 Annual operating cost- Rs.1600000 Worth of annual benefits Rs.5000000 Worth-of annual disbenefits- Rs.1100000 Salvage value = Rs.400000 Interest rate per year = 8% and useful lie = 30 Years Using benefit-cost ratio method (both conventional and modified), find out the economical acceptability of the publie project. Use PW,AW and FW methods to find out the equivalent worth of costs, benefits and disbenefits.Explanation / Answer
Question 10. (A) Answer :- A curve showing different combinations of two commodities giving the same level of satisfaction is called indifference curve. An indifference curve is the locus of points - particular combinations of bundles of goods which yield the same utility (level of satisfaction) to the consumer, so that he is indifferent as to the particular combination, he consumes.
Assumptions of indifference curve :-
1). Indifference curve is based on the assumption of the maximization of satisfaction function by each individual consumer with his given income and market prices. He has perfect knowledge of the market conditions regarding the availability of goods and their prices.
2). Indifference curve assumes that satisfaction is measured in ordinal numbers like I, II and III in place of cardinal numbers like 1, 2 and 3. There is scale of preference on the basis of which goods are put in order of preferences.
3). The money income or budget of each consumer is given which is spent on purchasing various goods and services to satisfy his wants. He tries to maximize his satisfaction with this given income or budget constraint.
4). Indifference curve assumes that there is diminishing marginal rate of substitution (MRSXY) when a consumer consumes X and Y commodities.
5). Indifference curve is based on the static model of economics. It assumes that goods are divisible into small pieces and there is perfect certainty.
Properties of indifference curve :-
a). Indifference curve is convex to the origin because of the application of the principle of diminishing marginal rate of substitution.
b). Indifference curves are negatively sloped, or they slope downward to the right.
c). Indifference curves do not intersect each other.
d). A higher indifference curve offers a higher level of satisfaction.
e). An indifference curve neither touches horizontal axis nor vertical axis.
f). Perfect complementary goods have L-shaped indifference curves.
g). Indifference curves are not necessarily parallel to each other.
h). All the combinations of two commodities on an indifference curve give the same level of satisfaction.