Advertisements
Advertisements
Question
Observe the graph given below and answer the question that follow.
- Give a reason to explain if the graph shown above can be a common phenomenon or not. [2]
- What is an indifference map? Draw its diagram. [2]
- State any two differences between cardinal utility and ordinal utility. [2]
Solution
- The graph shows an upward-sloping Indifference Curve (IC). This is an unusual phenomenon since an indifference curve exists when there is a "bad" commodity on the X axis and a "good" commodity on the Y axis. The IC slopes upward. Because when consumption of "bad" goods increases, consumption of "good" commodities must also increase in order to maintain the same level of satisfaction.
-
An indifference map is a collection of indifference curves that describe a consumer's preferences for various bundles of commodities about which the consumer is undecided. Each curve on the map represents a combination of commodities that deliver the same amount of satisfaction or utility to the customer. In general, the further a curve goes from its origin, the greater its utility because it contains more of one or both goods.
Cardinal utility Ordinal utility Cardinal utility assumes that utility can be measured in absolute numbers, like 10, 20, 30, etc. Ordinal utility only ranks preferences, like 1st, 2nd or 3rd, without specific numerical values. Cardinal utility is based on the assumption that the satisfaction derived from goods can be quantitatively measured. Ordinal utility only considers that satisfaction can be ordered or ranked but is not quantifiable.
APPEARS IN
RELATED QUESTIONS
Explain the conditions of consumer’s equilibrium using indifference curve analysis.
Explain the three properties of the indifference curves.
Define an indifference curve.
Explain why an indifference curve is downward sloping from left to right.
Why is an indifference curve negatively sloped? Explain.
If Marginal Rate of Substitution is constant throughout, the Indifference curve will be :(choose the correct alternative)
a. Parallel to the x-axis.
b. Downward sloping concave.
c. Downward sloping convex.
d. Downward sloping straight line.
If Marginal Rate of Substitution is increasing throughout, the Indifference Curve will be: (Choose the correct alternative)
a. Downward sloping convex
b. Downward sloping concave
c. Downward sloping straight line
d. Upward sloping convex
Define indifference map.
Define an indifference map. Why does indifference curve to the right show more utility? Explain.
What are the properties of indifference curves?
Read the following passage and answer the question that follows:
| 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. |
How is utility measured in Ordinal utility theory?
Assertion (A): A lower indifference curve represents a higher level of satisfaction.
Reason (R): According to the Indifference Curve Approach, utility is an ordinal concept, that is, it can be ranked and not measured.
Which of these is not a property of indifference curve?
Identify the correct pair of items from the following Columns I and II:
| Column I | Column II |
| (1) Monotonic Preferences | (a) Consumer preferences are called monotonic when between any three bundles, consumers always choose a bundle having more of one good and no less of other goods. |
| (2) Indifference Set | (b) It is a set of those divisions of two goods that offer the consumer the same level of satisfaction so that the consumer is indifferent across any number of combinations in his indifference set. |
| (3) Indifference Curve | (c) It is a curve showing the different combinations of two goods, each combination offering the same level of satisfaction to the consumer. |
| (4) Indifference Map | (d) It refers to a set of indifference curves placed in different diagrams for the same type of goods. |
Which of the following is an assumption for Indifference Curve Approach.
Will you defend or refute the case depicted in the following diagram? Provide a rationale in support of your view.
