M E Assignment A
Q.1. What are indifference curves? Explain the consumers’ equilibrium under the assumptions of ordinal approach.
Utility of goods cannot be measured in terms of précised quantitative term. J. R. Hicks and R.G.D. Allen developed Indifference Curve analysis based on ordinal approach. Indifference curve (IC) is defined as the locus of point which show the different combination of two goods or commodities a consumer is indifferent about the point A or B or C or D. According to this analysis the consumer can state which combination of goods he prefers without describing the quantum of his preferences. That is he can rank the combination of goods in scale of preferences. If the various combinations marked A, B, C, D, etc. the consumer can tell whether he prefers a particular combination or he is indifferent between them. He can only tell that in terms of satisfaction whether he gets higher satisfaction, lower or equal satisfaction to another combination.
INDIFFERENCE CHART
The IC analysis includes all those combinations of goods that gives equal satisfaction to the consumer. Therefore all combinations of goods lying on the indifference curve are equally preferred by him. And a graph showing a whole set of indifference curves is called an indifference map. Each curve further to first curve shows higher level of satisfaction. Under the assumptions of ordinal approach which are individuals are rational in decision making, Utility cannot be measured cardinally, assumed diminishing marginal rate of substitution, consumer remains consistent in his choice, his preferences are not self-contradictory and The goods consumed by the consumer are substitutable. Through IC Analysis the consumer is said to be in equilibrium when he maximize his utility based on his income and market price.
Suppose a consumer has Rs. 500/- to spend on two goods X and Y. If price of good X is Rs. 10 per unit and price of good Y is rupees 5/-
Utility of goods cannot be measured in terms of précised quantitative term. J. R. Hicks and R.G.D. Allen developed Indifference Curve analysis based on ordinal approach. Indifference curve (IC) is defined as the locus of point which show the different combination of two goods or commodities a consumer is indifferent about the point A or B or C or D. According to this analysis the consumer can state which combination of goods he prefers without describing the quantum of his preferences. That is he can rank the combination of goods in scale of preferences. If the various combinations marked A, B, C, D, etc. the consumer can tell whether he prefers a particular combination or he is indifferent between them. He can only tell that in terms of satisfaction whether he gets higher satisfaction, lower or equal satisfaction to another combination.
INDIFFERENCE CHART
The IC analysis includes all those combinations of goods that gives equal satisfaction to the consumer. Therefore all combinations of goods lying on the indifference curve are equally preferred by him. And a graph showing a whole set of indifference curves is called an indifference map. Each curve further to first curve shows higher level of satisfaction. Under the assumptions of ordinal approach which are individuals are rational in decision making, Utility cannot be measured cardinally, assumed diminishing marginal rate of substitution, consumer remains consistent in his choice, his preferences are not self-contradictory and The goods consumed by the consumer are substitutable. Through IC Analysis the consumer is said to be in equilibrium when he maximize his utility based on his income and market price.
Suppose a consumer has Rs. 500/- to spend on two goods X and Y. If price of good X is Rs. 10 per unit and price of good Y is rupees 5/-