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Unit-4: Ordinal Utility Theory: Indifference Curve Approach

Following can be described by Table 2 and Fig. 4.3 Notes

Table 2: Constant Marginal Rate of Substitution
Marginal Rate
Combination Apples Oranges
of Substitution
A 1 10
B 2 9 1:1
C 3 8 1:1

D 4 7 1:1

Table 2 represents that to get one additional unit of apple the consumer has to sacrifice one orange. In
other words, marginal rate of substitution will be equal i.e. 1:1.

Figure 4.3 shows that when consumer moves from point A to point B, he sacrifices one orange to get an
additional apple. In this situation, marginal rate of substitution of apple for orange is 1:1 for consumer.
Similarly, when he moves from B to C or C to D, i.e., shifts from one point to another point, then
marginal rate of substitution remains the same i.e. 1:1. In this condition indifference curve will be down-
ward sloping on straight line from left to right as shown in Fig. 4.3

Fig. 4.3

Y
Constant
A Mrs XY [1:1]
10 B
Oranges 9 C

8
D
7
IC
O X
1 2 3 4
Apples

(ii) Increasing Marginal Rate of Substitution
Increasing marginal rate of substitution means when the stock of any product increases with the
consumer, then to maintain the same level of satisfaction, he substitutes that product for another
product at increasing rate. For example, to get one more unit of product X, 2 units of product Y are
sacrificed and to get one more unit of X, 3 units of product Y are sacrificed. In this condition, slope of
indifference curve is concave to the point of origin as shown in Fig. 4.4

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