- To sketch indifference curves
- To interpret the slope of an indifference curve at a point
- To understand the Law of Diminishing Marginal Utility
- To illustrate the Law of Diminishing Marginal Rate of Substitution
- The equation for an indifference curve is given by: Y = 10000/X,
where X is the amount of Good 1 (coconuts) and Y is the amount of Good 2 (bagels). This equation represents combinations of coconuts and bagels that yield the consumer the same level of utility (10,000 units in this exercise).
- Sketch the indifference curve. Plot coconuts on the horizontal axis. Note that the curve doesn't intersect either axis.
- Using the calculator below:
- Select a value for X.
- Click on Gimme Indifference Curve! to obtain the corresponding amount of bagels, and the slope of the indifference curve at that point.
- Technical note for the calculus-inclined: Slope = -Y/X.
- Using the given equation, sketch the indifference curve with Good 1 (coconuts) on the horizontal axis.
- Indicate Point M on the curve such that the number of coconuts consumed is 20. The corresponding number of bagels is _____, and the slope of the curve at that point is ______. [Note: You may obtain both values from the calculator above.]
- At Point M, the consumer is willing to give up ________ bagel(s) in order to gain _____ coconut(s).
- Consider Point N on the curve such that X = 100. At N, the marginal rate of substitution is ________ [ coconuts per bagel / bagels per coconut ].
- Does the given indifference curve exhibit the Law of Diminishing Marginal Rate of Substitution? Explain.
- Suppose the indifference curve is a negatively-sloped straight line. Using a sketch (with Good 1 on the horizontal axis), one may show that as the amount of Good 1 increases, the MRS [ decreases / increases / remains constant ].
- According to the Law of Diminishing Marginal Utility, as the consumption of coconuts increases, ceteris paribus, the consumer's utility [ rises / falls ] at [ an increasing / a decreasing ] rate.