Question

State two assumptions of indifference curve analysis.

State the assumptions of indifference curve analyses.

Answer 1

1. Rationality: The consumer is assumed to be rational. He aims at attaining the highest possible indifference curve so as to maximise total satisfaction while allocating his income among various commodities.
2. Ordinal Utility: Indifference curve analysis assumes that the utility is only ordinally measurable rather than being measured in quantitative terms.
3. Non-satiety: It is also assumed that the consumer is not oversupplied with goods consumed by him. That is, he has not reached the point of saturation in case of any one commodity. Therefore, a consumer will always prefer a larger amount over a smaller amount of a commodity.
4. Transitivity of Choice: Consumer's choices are assumed to be transitive. Transitivity of choice means that if consumer prefers combination 'A' to combination 'B' and combination 'B' to combination 'C', he must prefer combination 'A' to combination 'C'. Likewise, if a consumer is indifferent between 'A' and 'B' and 'B' and 'C', then he will be indifferent between 'A' and 'C'. The implication of the assumption of transitivity of choice is that the taste of the consumer is consistent.
5. Diminishing Marginal Rate of Substitution: Indifference curve analysis is based on the assumption of diminishing marginal rate of substitution. This means that as the consumer substitutes more and more of one commodity (say X) for another commodity (say Y), he will be prepared to give up lesser units of the later (Y) for each additional unit of the former (X).