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Explain the indifference-curves theory Assumptions

Explain the indifference-curves theory Assumptions

Answers

Wilfred
a) Rationality the consumer is assumed to be rational, that is he aims at maximization of his utility, given his income and market prices. it is assumed he has full knowledge of all the relevant information

b) Utility is ordinal. It is taken as axiomatically true that the consumer can rank his preferences (that is ordering the various baskets of goods) according to satisfaction of each basket. He needs not to know precisely the amount of satisfaction. It is sufficient that he expresses his preference for the various bundles of commodities.

c) Diminishing marginal rate of substitution. Preferences are ranked in terms of indifference curves, which are assumed to be convex to the origin. This implies that the slope of the indifference curves increases. The slope of the indifference curve is called the marginal rate of substitution of the commodities. The indifference curve theory is based, thus on the axiom of diminishing rate of substitution

d) The total utility of the consumer depends on the quantities of the commodities consumed. That is U=f(q1,q2,...,qx,qy,...,qn)

Wilfykil answered the question on March 20, 2019 at 07:56

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