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Economics Assignment #1
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Submitted to Mr. Getnet B.

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Submitted by Nigus Solomon
Section B

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 1. B
2. D
3. C
4. A
5. B
6. A
7. C
8. A
9. A
10. A

11. List at and explain at least three characteristic features of

indifference curves?
1. Indifference Curves are Downward Sloping
Virtually all indifference curves have a negative slope. That is, they slope
downward from left to right. The slope of the curve shows the rate of substitution
between two goods, i.e. the rate at which an individual is willing to give up some
quantity of good A to get more of good B. If we assume that the individual likes
both goods, the quantity of good B has to increase as the quantity of good A
decreases, to keep the overall level of satisfaction the same. Because both axes
each represent one of the two goods, this relationship results in a downward
sloping curve.
2. Higher Indifference Curves Are Preferred to Lower Ones
Consumers will always prefer a higher indifference curve to a lower one. This is
due to the basic economic assumption that “more is always better“. Think about it
if someone were to ask you if you wanted a free slice of pizza or an entire pizza for
free, what would you say? Who says no to free pizza, right? Now, of course, it’s
not always that simple, but in basic economic theory, we can assume that
consumers have a preference for larger quantities. This is reflected graphically in
the indifference map. The higher the indifference curves are, the larger the
quantities of both goods. And thus, the more preferable the curve becomes.
3. Indifference Curves Cannot Intersect
Two indifference curves can’t cross. To understand why this is the case, we can
look at what would happen if they did intersect. As we know, all combinations of
good A and good B that lie on the same indifference curve make the consumer
equally happy. Therefore, if two indifference curves were to cross, they would both
have to provide the consumer with the same level of total satisfaction, because the
exact point where they intersect (i.e., point A) is on both curves. Thus, all other
combinations on both curves would have to provide the same level of satisfaction
as well. However, if we compare point B and point C, we can see that point C
offers more of good A and good B (90 and 140) as compared to point B (80 and
130). As we already learned above, consumers always prefer larger quantities.
Therefore both curves can’t provide the same level of satisfaction, which means
they can never intersect.
4. Indifference Curves are convex (i.e., bowed inward)
In most cases, indifference curves are bowed inward. This has to do with the
marginal rate of substitution (MRS). We know that the marginal utility of
consuming a good decreases as its supply increases (see also diminishing marginal
utility). Therefore consumers are willing to give up more of this good to get
another good of which they have little. Let’s look at the graph below to illustrate
this. If a consumer has a lot of good B, the MRS is 3 units of good B per unit of
good A. If she has more of good A, the MRS is 0.5 units of good B per unit of
good A. In other words, if they have a lot of good B, they are more willing to trade
some of it in to get an additional unit of good A and vice versa. Because of this
relationship, the indifference curve is bowed inward

12. An Indifference curve Is a locus of points each showing a

different combination of two goods which yield the same
satisfaction to the consumer?
13. List and explain the approaches of Utility measurement?
Measurement of Utility
Measurement of a utility helps in analyzing the demand behaviour of a customer. It
is measured in two ways
Cardinal Approach
In this approach, one believes that it is measurable. One can express his or her
satisfaction in cardinal numbers i.e., the quantitative numbers such as 1, 2, 3, and
so on. It tells the preference of a customer in cardinal measurement. It is measured
in utils.
Limitation of Cardinal Approach
 In the real world, one cannot always measure utility.
 One cannot add different types of satisfaction from different goods.
 For measuring it, it is assumed that utility of consumption of one good is
independent of that of another.
 It does not analyze the effect of a change in the price.

Ordinal Approach
In this approach, one believes that it is comparable. One can express his or her
satisfaction in ranking. One can compare commodities and give them certain ranks
like first, second, tenth, etc. It shows the order of preference. An ordinal approach
is a qualitative approach to measuring a utility.
Limitation of Ordinal Approach
 It assumes that there are only two goods or two baskets of goods. It
is not always true.
 Assigning a numerical value to a concept of utility is not easy.
 The consumer’s choice is expected to be either transitive or
consistent. It is always not possible.
14. What are the determinants of price elasticity of demand?
The following are the main factors which determine the price elasticity of
demand for a commodity: 1. The Availability of Substitutes 2. The Proportion of
Consumer’s Income Spent 3. The Number of Uses of a Commodity 4.
Complementarity between Goods 5. Time and Elasticity.