Answer to Question #250380 in Microeconomics for Sennin

Question

Draw the indifference map by considering the different types of goods on both the axis and explain how the consumer will move to a higher indifference curve with some real life examples.

(i) Normal good on both axis

(ii) Perfect Substitutes on both axis

(iii) Perfect Complements on both axis

(iv) Bads on one axis and normal goods on another axis

(v) Neutral goods on one axis and normal goods on another axis

Answer 1

Solution:

An indifference curve is a line showing all the combinations of two goods that give a consumer equal utility.

 

i.). Normal good on both axis.

There is a positive income effect in the case of normal goods. This means that as income rises, so does the quantity demanded, and vice versa. For normal goods, the indifference curve slopes upward.

As income rises, the quantity demanded for Good X rises from X1 to X3, and the quantity demanded for Good Y rises from Y1 to Y3, as indifference curves shift from 1C1 to IC3.

 

The graph below depicts this:

 

ii.). Perfect Substitutes on both axis:

The indifference curves will lose their convexity for perfect substitutes, that is, they will become straight lines. If a person consumes one less unit of a perfect substitute good, he will need an additional item of the other perfect substitute to keep the same utility level. Thus, the indifference curve of perfect substitute goods is a 45 degrees straight line.

 

The graph below depicts this:

 

 

iii.). Perfect Complements on both axis:

Complementary goods are those that are directly related to one another. In other words, these are the goods that are required in tandem. For example, a car and gasoline are both in high demand. When the price of a car rises, so does the demand for gasoline, and vice versa. The demand curve for such goods has an L shape.

 

The graph below depicts this:

 

 

 

iv.). Bads on one axis and normal goods on another axis:

 A bad good is a product that is disliked by the consumer. An indifference curve will represent one normal good and one bad. When one of the two products displayed in the indifference curve is bad, it means that the consumer prefers less of that product rather than more of the good. Therefore, the indifference curves are upward sloping to the left when the bad good is on the X-axis and normal good on the Y-axis since for every bad good the consumer takes, he or she will be compensated with a normal good.

The graph below depicts this:

 

 

 

v.). Neutral goods on one axis and normal goods on another axis:

A commodity can be a neutral good, which means that the consumer doesn't care whether he has more or less of it. That is, more or less of a neutral product has no effect on his satisfaction. If commodity X is neutral good and Y is a normal good, then indifference curves will be horizontal lines, and the direction of preference will be upward to the north, indicating that a higher level of indifference curve will mean a higher level of satisfaction because upward movement means a 'good' commodity is increasing while the quantity of a neutral good remains constant.

 

The graph below depicts this: