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Question
A consumer consumes only two goods. If the price of one of the goods falls, the indifference curve: (Choose the correct alternative)
a. Shifts upwards
b. Shifts downwards
c. Can shift both upwards or downwards
d. Does not shift
Solution
A fall in the price of one good will not shift the indifference curve. An indifference curve represents all combinations of two goods which give the same level of satisfaction to a consumer. Therefore, a change in the price of anyone good will not affect the indifference curve.
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| The ordinal list revolution originates in the criticism of the psychological foundations of the theory of demand, namely, the principle of decreasing marginal utility as Alfred Marshall ([1890] 1898) used it. The rejection of hedonist hypotheses led Irving Fisher (1892) and Pareto (1896-97, 1900, 1909) to favour an objective or "positive" approach to economic concepts. The "ordinal list revolution" (Omarzabal 1995, 116) is grounded in a methodological transformation of economics that put the facts of objective experience as a foundation of economics and provided a research program for the ensuing years (Green and Moss 1993; Lewin 1996). Mathematically, ordinalism is entirely based upon the idea that one can dispense with the use of a specific utility function and that no meaning shall be attached to utility measurement, except as an ordinal principle. Clearly, the development of ordinalism must be separated from the introduction of the concept of the indifference curve. Ordinalism was first advocated in Fisher's "Mathematics Investigations" (1892) and Pareto's Sunto (1900) and Manual ([1909] 1971), while the indifference curve had appeared in F. Y. Edge Worth's Mathematical Psychics (1881). It was thus only through Fisher's and Pareto's recasting that the concept of the indifference curve became irreversibly associated with the promotion of ordinalism. Along the way, the recasting of the theory of choice along ordinal list lines raised a number of issues (about integrability, measurability, and complementarity) that would be progressively settled. The reasonable closing date for the ordinalist revolution is 1950, after Houthakker's (1950) and Samuelson's (1950) contributions. From the late 1920s, the Paretian school was progressively gaining a larger audience while the use of the concept of marginal utility and other derivative concepts was challenged. Consequently, demand theory was recast along with the principles of individual preferences and ordinal utility functions. Nevertheless, English authors proved very silent about the meaning of indifference curves. Most if not all of the reflections after 1920 about the nature of indifference curves took place in America, mainly under the impulse of Henry Schultz at Chicago. This is an American story. |
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