Define an indifference curve. Explain why an indifference curve is downward sloping from left to right.
An indifference curve is a graph showing different bundles of goods between which a consumer is indifferent. That is, at each point on the curve, the consumer has no preference for one bundle over another.
In the above figure, IC is the Indifference Curve. Each bundle on the IC shows those combinations of two goods that yield the consumer the same level of satisfaction.
This property implies that an indifference curve has a negative slope. If the preferences are monotonic, an increase in the amount of good: 1 along the indifference curve is associated with a decrease in the amount of good 2. This implies that the slope of the indifference curve is negative. Thus, monotonicity of preferences implies that the indifference curves are downward sloping from left to right.
When price of good is Rs 7 per unit a consumer buys 12 units. When price falls to Rs6 per unit he spends Rs 72 on the good. Calculate price elasticity of demand by using the percentage method. Comment on the likely shape of demand curve based on this measure of elasticity.
What does the Law of variable Proportions show? State the behaviour of total product according to this law.
Explain the conditions of a producer’s equilibrium in terms of marginal cost and marginal revenue. Use diagram.
Market for a good is in equilibrium. There is simultaneous increase both in demand and supply of the good. Explain its effect on market price.
Market for a good is in equilibrium. There is simultaneous decrease both in demand and supply of the good. Explain its effect on market price.
