Q. 12

Explain the follo

Answer :

(a) Movement along the same indifference curve.

a. All the points on an indifference curve represent all those combinations of two commodities which will provide the same level of satisfaction to the consumer.


b. This level of satisfaction will remain constant whether you move upward or downward on the same indifference curve.


c. The consumer will remain indifferent to these combinations because he does not have any preference among them.


d. However as be moved down on the indifference curve to the right, the slope of the indifference curve Falls.


e. This is because as the consumer consumes more and more of a commodity the marginal utility derived from that commodity continuous to fall.


f. This implies that the marginal rate of substitution decreases as we move down the indifference curve.


(b) The shift from a lower to a higher indifference curve.


a. Indifference curve which is near to the origin represents a lower level of satisfaction and the indifference curve which are away from the origin represent a higher level of satisfaction.


b. The further we move away from the origin the level of satisfaction increases.


c. In the given figure, IC1 represents the lowest level of satisfaction. The level of satisfaction increases as we move from IC1 to IC6.



OR


The law of equi marginal utility state that consumer is in equilibrium when he has attained maximum satisfaction out of his income and does not have any intention to make any change in its existing consumption.


In the case of multiple goods, the law of equi marginal utility the consumer will be in equilibrium when the ratio between the marginal utility and the price of one commodity will be equal to the ratio between the marginal utility and the price of another commodity. The consumer should incur his expenditure on different commodities in such a manner that his last rupee spent on the last unit of each commodity is equal.


This law is based on the following assumptions:


a. Rational behaviour of the consumer.


b. The consumer aims at maximizing his satisfaction from his income.


c. The utility should be measurable in terms of money.


d. The marginal utility of the money is constant.


e. The price of the commodity, the price of the other related commodities, the income of the consumer is constant throughout the act of consumption.


The condition for this law are:


a. The ratio between marginal utility and price of one commodity must be equal to


the ratio between marginal utility and price of other commodities.


MUx/Px = MUy/Py


b. The total expenditure should be equal to the total income.


An explanation for this law:


a. Let us assume that there are only two commodities X and Y that a consumer want to purchase with his income.


b. According to Marshall, “If a person has a thing which can be put to several uses,


will distribute it among these uses in such a way that it has the same marginal


utility in all.”


c. The consumer will be in equilibrium when the marginal utility of the money spent on each commodity is the marginal utility of money being spent on the commodity is equal to the marginal utility of the commodity divided by the price of the commodity.



The following figure can be used to explain this law:


Let us assume that the price of the goods X and Y are Rs 4 and Rs 5 respectively. The income of the consumer is Rs 35.


a. At the 5th unit of x commodity - MUx/Px = 48/4 =12


At the 4th unit of x commodity - MUy/Py = 60/5 =12


MUx/Px = MUy/Py = 12


b. Total expenditure is equal to total income = Px * Qx + Py * Qy


= 4*5 + 5*3


= 20+15


= 35


Both the conditions are satisfied. The consumer good purchase 5 units of x commodity and three units of Y commodity. This would maximize his satisfaction from his Limited income.


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