In the indifference curve approach, a consumer is in equilibrium when:
- A.The marginal rate of substitution equals the ratio of the prices
- B.The marginal utility of the good is zero
- C.The budget line cuts the indifference curve at two points
- D.Total utility is equal for both goods
Correct answer
Explanation
The correct answer is A, the marginal rate of substitution equals the ratio of the prices. Equilibrium is the point at which the budget line is tangent to the highest indifference curve the consumer can reach, and at a point of tangency the slopes of the two are equal, which means MRS of X for Y equals Px divided by Py; a second condition is that the indifference curve must be convex to the origin there. Option B is wrong because a zero marginal utility is the point of satiety in the cardinal approach for a single good, not the ordinal equilibrium. Option C is wrong because a budget line cutting an indifference curve at two points shows that a higher curve is still attainable, so the consumer is not yet in equilibrium. Option D is wrong because equality of total utilities is not a condition of equilibrium in either approach.
Read the full article: Utility and Indifference Curves: Consumer Behaviour Notes
Practice Questions
View allThe cardinal utility approach to consumer behaviour, which measures utility in units called utils, is associated with:
- A.Alfred Marshall
- B.J. R. Hicks
- C.Paul Samuelson
- D.Vilfredo Pareto
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Marshall, in his Principles of Economics, built the theory of demand on the assumption that utility is measurable in imaginary units, so that a consumer can compare the ten utils of a cup of tea with the six utils of a samosa; from this assumption he derived the law of…
Read the full explanation →Total utility is maximum when marginal utility is:
- A.Maximum
- B.Zero
- C.Negative
- D.Equal to average utility
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Marginal utility is the addition made to total utility by one more unit, so as long as it is positive total utility keeps rising; the moment it becomes zero nothing more is being added and total utility stands at its highest point, called the point of satiety.
Read the full explanation →The slope of an indifference curve at any point is called the:
- A.Marginal rate of substitution
- B.Price ratio
- C.Marginal propensity to consume
- D.Elasticity of substitution
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The marginal rate of substitution of X for Y is the number of units of Y a consumer is willing to give up to get one more unit of X while remaining on the same indifference curve, and it equals the ratio of the marginal utility of X to the…
Read the full explanation →An indifference curve is convex to the origin because of:
- A.Increasing marginal rate of substitution
- B.Diminishing marginal rate of substitution
- C.Constant marginal rate of substitution
- D.Diminishing returns to scale
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As a consumer moves down an indifference curve he holds more and more of the first good and less of the second, so each extra unit of the first is worth fewer units of the second to him; the slope therefore becomes flatter from left to right and the curve…
Read the full explanation →Which of the following is NOT a property of an indifference curve?
- A.It slopes downward from left to right
- B.It is convex to the origin
- C.Two indifference curves can intersect each other
- D.A higher indifference curve shows a higher level of satisfaction
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If two curves crossed, the combination at the crossing point would belong to both and would therefore give two different levels of satisfaction at the same time, a logical contradiction; for the same reason they cannot even be tangent.
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