Q.What is an Indifference Curve? What are its assumptions?
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Start your 14-day free trial to unlock the full solution →An Indifference Curve (IC) is the locus of all combinations of two goods that yield the consumer equal total satisfaction, so he is indifferent among them. It is based on ordinal utility (satisfaction can be ranked, not measured in numbers). Its assumptions are: the consumer is rational and aims at maximum satisfaction; utility is ordinal; preferences are complete, consistent and transitive; the consumer prefers more to less (monotonic preferences / non-satiety); and the marginal rate of substitution between the two goods diminishes.
Meaning of Indifference Curve
An indifference curve represents all those combinations of two goods (say X and Y) which give the consumer the same level of satisfaction. Since each combination yields equal satisfaction, the consumer is 'indifferent' as to which combination he chooses. A set of such curves is an Indifference Map, where a higher curve represents a higher level of satisfaction.
Assumptions of Indifference Curve Analysis
- Rationality: the consumer is rational and aims to maximise total satisfaction within his income.
- Ordinal Utility: satisfaction can only be ranked (first, second, third), not measured in exact numbers (utils). This replaces the cardinal measurement of the utility approach.
- Non-satiety (More is better / Monotonic preferences): the consumer always prefers a larger bundle of goods to a smaller one. …
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