Question

1.True or False On a given indifference curve, the marginal rate of substitution is always decreasing. (Explain your answer)

2 Common fallacies Why are these statements wrong? (a) Since consumers do not know about indifference curves or budget lines, they cannot choose the point on the budget line tangent to the highest possible indifference curve. (b) Inflation must reduce demand since prices are higher and goods are more expensive.

Answer 1

Sol 1 :

True

Marginal rate of substitution is the amount that the consumer is ready to give of good 2 in order to gain one more units of good 1.

Marginal Rate of substitution will declines because of the following reasons :

1. Law of diminishing Marginal Utility : when more and more units of 1 goods is consumed , consumer's intensity for desire of good 1 decreases and desire for another commodities tend to increases.
2. Mu for the Good 1 decreases whereas , Marginal Utility for the good sacrificed increases .

Accordingly, consumer wanted to sacrifice less and less amount of Good 2 to gain extra units of good 1.