NATURE OF UTILITY FUNCTION 1.

U = f(q1,q2) Continuous Continuous 1st and 2nd order partial derivatives Regular strictly quasi-concave function

Ordinal utility function of consumer q1= quantity of commodity Q1 consumed q2= quantity of commodity Q2 consumed partial derivatives are strictly positive, that is, consumer will desire more of both commodities U0 is a constant & is satisfied by an infinite number of combinations of Q1 & Q2. Thus all interior points on a line segment connecting two points on an IC lie on a higher ICs. This means that an IC expresses q2 as a strict convex function of q1, that is, IC curves are convex to the origin.

INDIFFERENCE CURVE (IC) 2. U0= f(q1,q2) U0= f(q01,q02) = f(q(1)1,q(1)2) Since utility function is strictly quasi-concave so U [ q01+(1- ) q(1)1 , q02+(1- ) q(1)2 ] > U0

For all 0< <1 RATE OF COMMODITY SUBSTITUTION (RCS) 3. dU=f1dq1+f2dq2 Total differential of utility function where, Along an IC, dU=0 f1dq1+f2dq2 =0 But 4. , so Slope of IC is the rate at which a consumer would be willing to substitute Q1 for Q2 per unit of Q1 in order to maintain a given level of utility. The negative of slope of IC is the RCS of Q1 for Q2 and is equal to the ratio of the partial derivatives of the utility function.

In cardinal analysis

5.

2 f12 f1 f2 f11 f22 f22 f21 > 0

Since utility function is strictly quasi-concave, the strict inequality is satisfied at each point within its domain. Rate of change of the slope of indifference curve (By differentiating 4)

6.

MAXIMIZATION OF UTILITY b