Page 56 - DECO405_MANAGERIAL_ECONOMICS

Unit 4: Consumer Behaviour (Utility Analysis)

The inconsistency that two different baskets of X and Y yield the same level of utility can be Notes
proved as follows.
Consider two other points: point B on indifference curve IC’ and point C on indifference curve
IC both being on a vertical line.
Points A, B and C represent three different combinations of commodities X and Y. Let us call
these combinations as A, B and C, respectively. Note that combination A is common to both the
indifference curves.
The intersection of the two indifference curves implies that in terms of utility, A=B; and A=C;
therefore A=C. But if B = C it would mean that in terms of utility,
ON of X + BN of Y = ON of X + CN of Y
Figure 4.3: Intersecting Indifference Curves

Since ON of X is common to both the sides, the above equation would mean that
BN of Y = CN of Y
But Figure 4.3 shows BN> CN. Therefore, combinations Band C cannot be equal in terms of
satisfaction. The intersection, therefore, violates the transitivity rule, which is a logical necessity
in indifference curve analysis. The same reasoning is applicable when two indifference curves
are tangent with each other.

Upper Indifference Curves represent a Higher Level of Satisfaction

An indifference curve placed above and to the right of another represents a higher level of
satisfaction than the lower one. In Figure 4.4, indifference curve IC is placed above the curve
2
IC . It represents, therefore, a higher level of satisfaction.
1
The reason is that an upper indifference curve contains all along its length a larger quantity of
one or both the goods than the lower indifference curve. And a larger quantity of a commodity
is supposed to yield a greater satisfaction than the smaller quantity of it, provided MU>0. For
instance, consider the indifference curves IC and IC in, Figure 4.4.
1 2

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