1.

The indifference curve pertains to the ordinal utility approach given by English economists,
John Hicks, and R.J. Allen. According to them, utility is psychological like happiness,
satisfaction, etc. it varies across different individuals and thus is subjective in nature. Hence it
cannot be measured in quantifiable parameters. According to the ordinal utility approach, the
utility can be measured in terms of greater or lesser than. This approach encourages the idea
of preference or ranking towards the usage of products. For example, a person can prefer
chocolate over ice cream thus giving chocolate rank 1 and ice cream rank 2. Hence, as per the
ordinal utility approach, a person identifies different pairs of products/commodities which
would provide them with the same level of satisfaction. Between these pairs, they might
prefer a product over other based on how they rank them in terms of utility. Thus, this implies
that utility can be judged qualitatively and not quantitatively.

The indifference Curve can be explained as a combination of points, where each point
represents a different combination of two products, which gives the consumer the same level
of utility or satisfaction. Hence the consumer is indifferent in his choice of either of the two
products. A consumer buys and uses a variety of product over time and soon start to release
some products that can be substituted with other product of the same kind which gives them
the same level of satisfaction and utility. In the combination of usage, the quantity of each
product can vary but the satisfaction and utility remain the same. Suppose for a particular
utility the consumer uses one quantity of say product “A” and for the same utility he uses two
quantities of product “B” giving them the same satisfaction level. When these kinds of
different combinations are plotted on a graph with “x” and “y” axis where both the axis
represent either of the product, we get a collection of points which when connected gives us a
convex curve to the origin, and this curve is known as Indifferent curve (IC). This curve is
also known as the iso-utility curve or equal utility curve.

IC

Product B

Product A

When we move along the indifference curve (IC) we observe the quantity of product “A” and
product “B” varies, this happens when a consumer starts to substitute one of the products
with the other one without affecting their satisfaction level.
 The rate at which one product can be substituted
with another product without affecting the satisfaction level is called “Marginal rate of
substitution” (MRS). The MRS for two products A and B can be defined as the quantity of
product A required to replace one quantity of product B or vice versa so that the utility from
every combination remains the same. This insinuates that the utility of A (or B) is equal to the
utility of additional units of B (or A). So according to the ordinal utility approach, MRSa,b
(or MRSb,c ) decreases, which implies that the quantity of a product a consumer is willing to
give up for an additional unit of the other product continues to decrease with each
substitution.
The different properties of the Indifference
curve are mentioned below: -
 The indifference curve is negatively sloped and is convex to the origin. The IC curve
is always sloped downward to the right because as the consumer increases the
consumption of product A, he starts to reduce the consumption of product B to
maintain the same level of satisfaction. IC curves are convex to the origin, implying
that as the consumer substitutes product A with product B, MRS of A for B
diminishes along with the IC.
 An IC lying above another IC in position implies a higher level of satisfaction for the
combination of products whose IC is higher with reference to the origin. For example,
the satisfaction level of product group CD is higher than group AB.

C
A

 ICs can never intersect with each other as it violates its basic premise that an IC on a
higher level will give more satisfaction than an IC on a lower level. And suppose they
intersect it would mean the curve which is at a higher level will give the same
satisfaction as the lower one at least at one point which will then violate its basic
premise.

The implication of the indifference curve is vital

in explaining the ordinal approach; however, it is criticized for various shortcomings
as mentioned below: -
 Indifference curve approach only considers two products in the market; however, the
market is filled with a large no of options for the consumer. So, it does not consider
the market behavior and how it affects the consumer decision-making process.
Changes in the price of other commodities in the market may affect the consumption
of the said product.
 IC approach is based on two commodities model, however, if er put more than two
products in the mix, it complicates the calculations. This leads to, making consumer
behavior prediction much harder.
 IC curve approach ignores the demonstration effect. The demonstration effect was
postulated by James Stemble Duesenberry, an American economist, it states that an
individual’s consumption pattern is affected by the level of consumption of other
individuals. This factor is ignored by IC thus limiting its use to understand consumer
behavior.
 Uncertainties and risks in the market and on an individual’s life are inevitable.
Authors of “The theory of games and economic behavior”, John Von Neumann and
Oskar Morgenstern pointed out that IC analysis has no parameters to analyze
consumer behavior in midst of uncertainty and risk that prevails in the market.
 IC is based upon the assumption that a consumer is aware of their preference for
various products available in the market, which is quite an unrealistic assumption as
the human brain has limitations and cannot always take a quick decision by analyzing
different products available in the market.

2.

In a given market, demand elasticity can be determined by observing how a change in an

economic variable impacts the quantity demanded. A product's demand is affected by a
variety of factors, including income levels within a segment, the price of the product, and
the price of other products within that segment. This measure shows how much change in
demand is observed when other factors in the economy change, such as price or income.
Demand fluctuates when other factors in the economy change. Using the elasticity of
demand definition, the difference between the number of things demanded and another
economic variable / the number of things demanded equals the elasticity of demand.
Accordingly, the elasticity of demand refers to the degree to which a commodity's
direction changes in response to changes in monetary factors affecting the market.
Commodities or careers may have five kinds of elasticity of demand. Flawlessly elastic,
elastic, unitary, inelastic, and flawlessly inelastic are the types. The market pliancy
decides how products are categorized, as usual, inferior, luxurious, necessities,
replacements, and complimentary. Since demand regulation states an inverse relationship
between price and demand for a commodity, the elasticity of demand for such a thing
may be acceptable or terrible. Contrary to this, the market is impacted by price.
Changes in the price of a product affect
people's demand for the product. This phenomenon is called price elasticity of demand. In
other words, the rate of elasticity of demand is the percentage change in demand due to
 the proportionate change in its price. Accordingly, the price elasticity of demand for
particular items is solely dependent on the factors that affect the price. The availability of
close substitutes for the best (A good with more substitutes has more elasticity than good
without any substitutes) is one factor that affects the rate of elasticity of demand. A
commodity's elasticity of demand is determined by its characteristics (a good maybe a
luxury, regular, inferior, or comfort item), and the share of profits spent by the consumer
on the commodity (if the client spends extra money on accurate, then the elasticity will be
higher). There are several aspects to consider: the price level of the item (usual elasticity
of a high-priced commodity is greater), taste, preference, and habits of the consumer, as
well as the earnings level of the customer.
It is stated in the question that the price of a
good has been modified from ₹4 to ₹5, which has dropped the demand for the good from
25 units to 20 units. We are asked to calculate the elasticities of demand for the good at
the new price. We can use the following system: 

Percentage change in quantity demanded

Price elasticity of demand =
Percentage change in the price of the product

Q1 – Q X 100
Percentage change in quantity demanded =
Q

P1 – P X 100
Percentage change in price =
P

Q is the original quantity demanded by the customer for a good or service,

Q1 is the new quantity demanded by the customer,
P is the original price of the commodity,
and P1 is the new price of the commodity,
as per the given question, Q is equal to 25 units, Q1 is equal to twenty units, P is equal to ₹4
and P1 is equal to ₹5
Percentage change in quantity demanded = Q1 – Q X 100
Q
= 20 – 25 X 100
25
=- 20%

Percentage change in quantity demanded = P1 – P X 100

P
=
5-4 X 100
4

= 25%
By computing the percentage change in the amount demanded at the percent change in the
price of the stated items, we can determine the rate of elasticity of demand for the product.

Price elasticity of demand = Percentage change in quantity demanded

Percentage change in the price of the product

-20%
=
25%

= -0.8
-0.8 or -0.8 are the elasticities of the demand for the good. Demand elasticity is less than one,
indicating inelastic demand for the good purchased by the consumer.
Following the above explanation of how to estimate the price elasticity of demand
for a product, and the calculation of the price elasticity of demand specifically described, we
will conclude that different aspects of human behavior might affect the price elasticity.
Additionally, the Elasticity of Demand may differ for different commodities depending on
the factors that affect the market and the client. In addition, we have learned that the rate of
elasticity of demand for an entity can be zero, infinite, equal to one, less than one, or greater
than one. It categorizes demand elasticity as unit elastic, perfectly elastic, flawlessly inelastic,
elastic, or inelastic. 

3a.

The elasticity of a commodities demand is its response to changes in factors affecting the
direction of demand based on adjustments to factors affecting its direction. The consumer's
choice and test are influenced by a number of factors, including consumer earnings, the price
of other products, the price of the product, etc.

                                                                                                 Using the cross elasticity of

demand, we can see how a commodity's demand is affected by changes in the price of its
corresponding products. In other words, the cross elasticity of demand is the proportion
change in the direction of a commodity because of the proportion change in the price of other
alternative or complementary goods.

                                                                                    A replacement item can be substituted if

it offers a better offer level than the alternative, for example, coffee or tea. etc. An increase in
the price of one product will increase the demand for its substitute, and vice versa.

Complementary items can't be substituted for each other. These goods are typically used
together- for example, toothbrushes and toothpaste. A price increase for one product will lead
to a decrease in demand for the complementary product.
 a) In the given scenario, the cross elasticity of demand for the given goods is +1.2.
Therefore, the given goods are replacement items. The excellent value shows that the
increase in price of one good will result in a rise in demand for a related product.
Assuming a 5% rise in the price of one commodity with 1.2 cross elasticity of demand, we
should calculate the change in the amount demanded for some other commodity while
keeping other factors constant. In this case, we can use the following formula:

Percentage change in quantity demanded (x)

Cross elasticity of demand =
Percentage change in the price of the product(y)

Percentage change in quantity demanded = ^Qx X 100

Qx

^Py X 100
Percentage change in price =
Py

Where,
^Qx is the change in quantity demanded of commodity X
Qx is the quantity demanded of commodity X
^Py is the change in the price of commodity Y
Py is the price of commodity Y

1.2 Percentage change in quantity demanded (x) =

5%

Percentage change in quantity demanded = 6%

By comparing the percentage change in quantity demanded with the percentage change in
quantity supplied, we can conclude that the goods are still substitutes

3b.

Marginal utility is defined as the additional level of satisfaction that a consumer receives
from consuming an additional unit of the commodity. Because marginal utility diminishes as
the consumer consumes more goods or services, the marginal utility also declines. Marginal
utility is calculated as follows: 

Change in total utility

Marginal utility =
Change in quantity consumed

The average utility is the level of satisfaction achieved by consuming one unit of a
commodity. You can calculate it by dividing the total utility by the quantity consumed by the
consumer. Specifically, you divide the utility by the quantity consumed.

Total utility
Average utility =
Quantity consumed

For one unit,

average utility =20/1 = 20
marginal utility = (20-0)/(1-0) = 20
for two units,
average utility = 35/2 = 17.5
marginal utility = (35/20)/(2-1) = 15
for 3 units,
average utility = 47/3 = 15.67
marginal utility = (47-35)/(3-2) = 12
for 4 units,
average utility = 55/4 = 13.75
marginal utility = (55-47)/(4-3) = 8
for 5 units,
average utility = 60/5 = 12
marginal utility = (60-55)/(5-4) = 5

Quantity consumed Total utility Average utility Marginal utility

1 20 20 20
2 35 17.5 15
3 47 15.67 12
4 55 13.75 8
5 60 12 5
Using the table, we can see that the marginal utility of the consumer declines with an increase
in the number of units consumed but remains optimistic. In other words, one extra team of
commodities provides the consumer with more satisfaction. With the increase in units
consumed and consumer utility, the average utility also decreases.