Page 63 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Microeconomic Theory

Notes
Fig. 4.14
Y
Cigarette gives zero satisfaction,
so the IC is horizontal
Other Goods IC 2

IC
1

O X
Cigarette

4. Exception 4: U-Shaped Indifference Curve Goods that give Negative utility: If consumption of any
product will result in negative utility after a certain limit, then its indifference curve, as shown in Fig. 4.15,
will be U shaped. For instance, at point Q, the consumer gets the quantity of goods which are needed.
After point Q, slope of indifference curve becomes positive. This shows that consuming additional food
will give negative utility to consumer. That’s why he will be eager to sacrifice some quantity of another
product to avoid utilizing that product. That is why after consuming any product till a certain limit the
utility derived from it becomes negative and slope of indifference curve becomes positive.

Fig. 4.15

Y

IC 2 IC 1
All Other Goods

O X
Q
Goods

4.11 Budget Line or Price Line

Indifference curve itself cannot simply predict the behaviour of the consumer because it leaves two important
information and those are income of the consumer and price of the product. Information about income and
price is shown by a different line in indifference figure, that line is known as budget line or price line.
Study of Budget line is essential to know about consumer’s equilibrium situation through indifference
curve analysis. This line is also known as price line, consumption possibility curve or line of combinations.

56 LOVELY PROFESSIONAL UNIVERSITY