ANSWER-1

Meaning- An indifference curve is a curve that represents all the combinations of goods that
provide the same satisfaction to the consumer. Since all the combinations give the same
amount of satisfaction, the consumer prefers them equally. Hence the name indifference
curve. An indifference curve can be defined as the locus of points each representing a
different combination of two substitutes, which yield the same level of utility to a consumer.

Here is an example to understand the indifference curve better.

Harry has 1 unit of food and 12 units of clothing. Now, we ask Harry how many units of
clothing he is willing to give up in exchange for an additional unit of food so that his level of
satisfaction remains unchanged.

Harry agrees to give up 6 units of clothing for an additional unit of food. Hence, we have two
combinations of food and clothing giving equal satisfaction to Harry as follows:

1. 1 unit of food and 12 units of clothing

2. 2 units of food and 6 units of clothing

By asking him similar questions, we get various combinations as follows:

Combination Food Clothing

A 1 12

B 2 6

C 3 4

D 4 3

Graphical representation-
The diagram shows an Indifference curve (IC). Any combination lying on this curve gives the
same level of consumer satisfaction. Another name for it is iso-utility curve.

PROPERTIES OF INDIFFERENCE CURVE-

 They Slope Negatively or Slope Downwards from the Left to the Right: This is an
important feature of Indifference Curve. If the total satisfaction is to remain the same, the
consumer must part with a diminishing number of bananas as he gets as increasing stock of
oranges. The loss of satisfaction to the consumer on account of the downward movement must be
made up by the gain through the rightward movement. As such the Indifference Curve must slope
downwards to the right.

 Every Indifference Curve to the right represents Higher Level of Satisfaction than
that of the Proceeding One: Let us take two Indifference Curves IC1 and IC2 lying to
the right of IC1. At the point P the consumer gets OM of oranges and ON of bananas. At
the point Q though the number of bananas remains the same i.e., ON, yet the number of
oranges increases from OM to OM1. The total satisfaction of the consumer is therefore
bound to be greater at Q than at P.
Hence Q represents a more valued and preferred combination of oranges and bananas than P. As
all the points on one Indifference Curve represents equal satisfaction, therefore every point on
IC2 represents a combination, preferred to that represented by any point on IC. An Indifference
Curve to the right represents a preferred position and therefore a consumer will always try to
move on the indifference map as much to the right as possible.
 Indifference Curves don’t Intersect each other- The fourth property of Indifference
Curve is that no two Indifference V’ Curves can ever cut each other.

Since point A is an Indifference Curve IC2, it represents a higher level of satisfaction to the
consumer c than point B which is located on the lower Indifference c Curve IC1. Point C,
however lies on both the curves. This m means that two levels of satisfaction, A and B which are
by definition unequal manage to become equal at the point C. This is clearly impossible.

CONCLUSION-
In reality, Indifference Curves are like Bangles: But as a matter of principle their effective
region is in the form of segments. This is so because Indifference Curves are assumed to be
negatively sloping and convex to the origin. An individual can move to the higher indifference.
Curves I2 and I3, until he reaches the saturation upon S where his total utility is the maximum. If
the consumer increases his consumption beyond X and Y his total utility will fall.

ANSWER-2
Price elasticity of demand is a measure of a change in the quantity demanded of a product due to
change in the price of the product in the market.
As per question-
P= 4
Q= 25
P1= 5
Q1= 20
Therefore, change in the price of good is-
∆P= P1-P
∆P= 5-4
∆P=1

Similarly, change in quantity demanded of good is-

∆Q= Q1-Q
∆Q= 20-25
∆Q= -5

Price elasticity of demand is-

E= ∆Q/∆P×P/Q

= -5/1×4/25
 = -4/5

= -0.8

Therefore, the price elasticity of demand is -0.8

ANSWER-3 a.
Cross elasticity of demand evaluates the relationship between two products when the price in one of
them changes. It shows the relative change in demand for one product as the price of the other rises or
falls.
(a) I would describe the goods as substitutes, as mentioned in the question ‘two goods have a
cross-price elasticity of demand of +1.2’. A positive cross elasticity of demand means that the
demand for good A will increase as the price of good B goes up. This means that goods A and B
are good substitutes. so that if B gets more expensive, people are happy to switch to A. An
example would be the price of milk. If whole milk goes up in price, people may switch to 2%
milk. Likewise, if 2% milk rises in price instead, whole milk becomes more in demand.

(b) If the price of one of the goods rises by 5 percent, the demand for the other good will go
down. As per the law of demand, the demand for a product falls with an increase in its prices
and vice-versa, while other factors are constant.

3 b.

QUANTITY TOTAL UTILITY MARGINAL AVERAGE

CONSUMED UTILITY UTILITY
1 20 20 20
2 35 15 17.5
3 47 12 15.67
4 55 8 13.75
5 60 5 12

Marginal utility = Change in total utility/ Change in Quantity

Average utility = The total unit of consumption of goods/number of Total Units.