Page 52 - DECO405_MANAGERIAL_ECONOMICS

Unit 4: Consumer Behaviour (Utility Analysis)

Going by the equi-marginal principle, the firm will allocate its total resource ( 100 million) Notes
among the projects A, B and C in such a way that marginal product of each project is the same i.e.,
MP = MP = MP .
A B C
It can be seen from the above table that going, by this rule, the firm will spend 1st, 2nd, 7th, and
10th unit of finance on project A, 3rd, 5th, and 8th unit on Project B, and 4th, 6th, and 9th unit on
project C. In all, it puts 4 units of its finances in project A, 3 units each in projects n and C. In other
words, of the total finances of 100 million, a profit maximization firm would invest 40
million in project A, 30 million each in projects B and C.

4.3 Indifference Curves and its Properties

An indifference curve may be defined as the locus of points. Each point represents a different
combination of two substitute goods, which yields the same utility or level of satisfaction to the
consumer. Therefore, he/she is indifferent between any two combinations of goods when it
comes to making a choice between them. Such a situation arises because he/she consumes a
large number of goods and services and often finds that one commodity can be substituted for
another. This gives him/her an opportunity to substitute one commodity for another, if need
arises and to make various combinations of two substitutable goods which give him/her the
same level of satisfaction. If a consumer faced with such combinations, he/she would be indifferent
between the combinations.

Example: If a consumer is asked whether he prefers combination 1 of two goods X and Y
(assuming that the market price of X and Y are fixed) or combination 2, he may give one of the
following answers:
1. he prefers combination 1 to 2

2. he prefers combination 2 to 1
3. he is indifferent about combinations 1 and 2.
The third answer implies that the consumer prefers 1 as much as 2. There may be some more
combinations of goods X and Y which are equally preferable to him. Suppose, there are five
different combinations of X and Y, that gives him the same level of satisfaction (shown in
Table).
Indifference Combination of X and Y Goods

Combination Units of X Units of Y
1 3 21
2 4 15
3 5 11
4 6 8
5 7 6

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