Question

How does diminishing marginal rate of substitution affect the shape of indifference curve?

Answer 1

Another property of indifference curve is that it is convex to the origin. Convexity of the indifference curve implies that it bows inward to the point of origin. In other words, the slope of the indifference curve decreases as we move down the indifference curve. This follows from the assumption of diminishing marginal rate of substitution. The indifference curve analysis is based on the assumption of diminishing marginal rate of substitution. This assumption implies that lesser is the amount of one commodity consumed by a household, the lesser willing the household will be to give up a unit of that commodity to obtain an additional unit of the other commodity. We normally observe that the consumer's willingness to sacrifice a commodity is lower when the stock of the commodity with him is less. He gives more significance to a unit of the commodity the amount of which is decreasing. Thus, as we move down the Table and indifference curve IC in diagram. through combinations 'A' to 'D', the household is consuming lesser and lesser quantity of cloth and more and more quantity of food. In accordance with the assumption of diminishing marginal rate of substitution, the rate at which the consumer is willing to give up further clothing to get more food diminishes. When the household moves from 'A' to 'B', for example, the household is prepared to give up 3 units of clothing for 1 unit of food, but when he moves from 'B' to 'C', he is willing to give up only 2 units of clothing for 1 unit of food.

The slope of the indifference curve shows the marginal rate of substitution because it indicates the rate at which the consumer is willing to substitute one good for the other. The assumption of diminishing marginal rate of substitution implies that the slope of the indifference curve must be decreasing from left to right. In other words, an indifference curve must be convex to the origin.

Combination	Food (units)	Clothing (units)	Marginal Rate of Substitution
(1)	(2)	(3)	(4)
A	1	10	-
B	2	7	3:1
C	3	5	2:1
D	4	4	1:1