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Indian EconomyMedium

The ordinal utility approach to the theory of consumer behaviour was developed by:

  1. A.Adam Smith and David Ricardo
  2. B.J. R. Hicks and R. G. D. Allen
  3. C.Alfred Marshall and A. C. Pigou
  4. D.J. M. Keynes and Joan Robinson

Correct answer

B. J. R. Hicks and R. G. D. Allen

Explanation

The correct answer is B, J. R. Hicks and R. G. D. Allen. In their joint work of 1934, and later in Hicks's Value and Capital, they replaced the measurement of utility with the ranking of preferences and rebuilt the theory of demand on indifference curves, the marginal rate of substitution and the budget line. Option A is wrong because Adam Smith and Ricardo belong to the classical school, which worked with a labour theory of value and not with utility analysis. Option C is wrong because Marshall is the author of the cardinal approach and Pigou worked mainly on welfare economics. Option D is wrong because Keynes founded macroeconomics with his theory of employment and income, while Joan Robinson is known for imperfect competition. Remember that Edgeworth first drew the indifference curve and Pareto developed it.

Read the full article: Utility and Indifference Curves: Consumer Behaviour Notes

Practice Questions

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Q1.Indian EconomyEasy

The cardinal utility approach to consumer behaviour, which measures utility in units called utils, is associated with:

  1. A.Alfred Marshall
  2. B.J. R. Hicks
  3. C.Paul Samuelson
  4. D.Vilfredo Pareto
Show answer
Correct answer: A. Alfred Marshall

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…

Q2.Indian EconomyEasy

Total utility is maximum when marginal utility is:

  1. A.Maximum
  2. B.Zero
  3. C.Negative
  4. D.Equal to average utility
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Correct answer: B. Zero

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.

Q3.Indian EconomyMedium

The slope of an indifference curve at any point is called the:

  1. A.Marginal rate of substitution
  2. B.Price ratio
  3. C.Marginal propensity to consume
  4. D.Elasticity of substitution
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Correct answer: A. Marginal rate of substitution

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…

Q4.Indian EconomyMedium

An indifference curve is convex to the origin because of:

  1. A.Increasing marginal rate of substitution
  2. B.Diminishing marginal rate of substitution
  3. C.Constant marginal rate of substitution
  4. D.Diminishing returns to scale
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Correct answer: B. Diminishing marginal rate of substitution

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…

Q5.Indian EconomyMedium

Which of the following is NOT a property of an indifference curve?

  1. A.It slopes downward from left to right
  2. B.It is convex to the origin
  3. C.Two indifference curves can intersect each other
  4. D.A higher indifference curve shows a higher level of satisfaction
Show answer
Correct answer: C. Two indifference curves can intersect each other

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.