Question

Draw an indifference curve that shows the diminishing marginal rate of substitution. Label it IC. Draw a point on the indifference curve and label it A. Draw a line the slope of which shows the marginal rate of substitution at point A.

Answer 1

Answer & Explanation :

Indifference Curve is a graph showing product combinations, that give consumer the same level of satisfaction.

It is a downward sloping curve, as remaining at same level of satisfaction - if consumption of one good increase, consumption of other good decrease & vice versa.So, the two goods are inversely related and the curve downward sloping

The curve is also concave i.e inwards bowing towards origin. This is because of increasing Marginal Rate of Substitution. MRS is ratio of good sacrifised to gain an additional unit of other good, staying at same satisfaction level & same indifference curve. MRS is slope of IC ; it is decreasing because - as consumer gains more & more of a good, he/ she is willing to sacrifise lesser & lesser amount of the sacrifised good each successive time.

• A downward sloping concave inward bowing towards origin IC shows diminishing MRS
• Any point 'A' on PPC shows product combination that yields same level of satisfaction to consumer as all other points on PPC
• Line of slope ΔY/ΔX reflects good sacrifised, good gained ratio i.e MRS (At point A).