Answer to Question #243954 in Microeconomics for Laisiana.Lavo

Question

Define with example:
Indifference curve
Marginal rate of substitution
Indifference curve and transtivity

Answer 1

Solution:

1.). An indifference curve is a curve that displays all combinations of two products that provide an equal level of satisfaction or utility thus making the consumer indifferent. The consumer has an equal preference for the combinations of the two products. Indifference curves are convex to the origin and no two indifference curves ever intersect.

An example of an indifference curve is displayed below:

 

2.). Marginal rate of substitution refers to the willingness of a consumer to replace one good for another good, as long as the new good is equally satisfying. The MRS is the slope of the indifference curve at any given point along the curve and shows a frontier of utility for each combination of good X and good Y.

It is derived by calculating the change in good Y over the change in good X, or change in marginal utility for good x over marginal utility for good y.

 

An example of MRS is shown by the below graph:

 

 

3.). Indifference curve and transitivity mean that preferences are transitive if they are internally consistent. That is if A is preferred to B and B is preferred to C, then it must be that A is preferred to C.  

An example of indifference curve and transitivity is shown by the below graph: