Question

Question 1 If good X is measured on the horizontal axis and good Y on the vertical, what can you say about the preferences of someone whose indifference curves are described below?

(i) parallel to the Y axis? (5 pts)

(ii) upward sloping with utility increasing as one moves to the right? (5 pts)

(iii) downward sloping with utility increasing as one moves to bottom-left? (5 pts)

Answer 1

i) A utility curve parallel to Y axis is a vertical utility curve. It implies that even if the quantity of Y increases, the utility of the individual does not. Therefore, the utility of the individual is independent of good Y - Good Y provides no utility and only good X provides utility. Here, good Y is a neutral

ii)

An upward sloping utility curve means that one of the goods being consumed is a bad. And here, utility increases as we move to the right. Therefore, holding quantities of Y constant, as quantity of X increases, utility increases. Therefore, good Y is a bad.

What does this mean? As the consumption of Y increases, the consumption of X also has to increase to keep the utility constant. Y may be a good like pollution and good X can be air purifiers. As pollution increases, you need more air purifiers or else your utility will decline.

iii)

Indifference curves are generally downward sloping. It means that to keep utility constant, some of good Y has to be given up and more of X has to be consumed. And utility generally increases as we move to top right.

However, here it is said that utlity increases as we move to bottom left. This means that utlity is higher the lesser of both goods one consumes. Here, both goods are bad.

For instance, air pollution on X axis and noise pollution on Y. You'd be better off if both of them decrease - I.e. lower the quantity of each that you have to consume.