The decision rule for utility maximization is to purchase those items that give the greatest marginal utility per dollar and are affordable or within the budget. Many grocery stores provide a tag that indicates the price per pound for the good.

A Rule for maximizing Utility If a consumer wants to maximize total utility, for every dollar that they spend, they should spend it on the item which yields the greatest marginal utility per dollar of expenditure.

Utility Maximizing Rule. to maximize satisfaction the consumer should allocate his or her money income so that the last dollar spent on each product yields the same amount of extra (marginal utility).

To find the consumption bundle that maximizes utility you need to first realize that this consumption bundle is one where the slope of the indifference curve (MUx/MUy) is equal to the slope of the budget line (Px/Py) in absolute value terms. You know MUx = Y and MUy = X, so MUx/MUy = Y/X. You know that Px/Py = 2/4=1/2.

To find total utility economists use the following basic total utility formula: TU = U1 + MU2 + MU3 … The total utility is equal to the sum of utils gained from each unit of consumption. In the equation, each unit of consumption is expected to have slightly less utility as more units are consumed.

A perfect substitute can be used in exactly the same way as the good or service it replaces. This is where the utility of the product or service is pretty much identical. For example, a one-dollar bill is a perfect substitute for another dollar bill.

When two goods are perfect complements, they are consumed proportionately. The utility that gives rise to perfect complements is in the form u(x, y) = min {x, βy} for some constant β (the Greek letter “beta”). First observe that, with perfect complements, consumers will buy in such a way that x = βy.

MRS calculates the rate at which one good is substituted for another, keeping utility constant. MRS for Cobb Douglas changes at every point along an indifference curve. MRS for perfect complements is same along a vertical or horizontal strip, while it is not defined at the kink.

Essentially, MRS is the slope of the indifference curve at any single point along the curve. Most indifference curves are usually convex because as you consume more of one good you will consume less of the other. So, MRS will decrease as one moves down the indifference curve.

The indifference curves cannot intersect each other. It is because at the point of tangency, the higher curve will give as much as of the two commodities as is given by the lower indifference curve.

Indifference curves are downward in slope. An indifference curve measures the value a consumer receives from the consumption of two different products. If the level of satisfaction is high for the consumption of one good, it will be lower for the consumption of the second good. Thus, the curve must be downward sloping.

Since a higher indifference curve represents a higher level of satisfaction, a consumer will try to reach the highest possible IC to maximize his satisfaction. In order to do so, he has to buy more goods and has to work under the following two constraints: He has to pay the price for the goods and.

i Indifference Curve Slopes Downwards :because in order to consume more units of X good the consumer must give up some quantity of Y good so that consumer remains on the same level of satisfaction at each of an indifference curve.

Indifference curves slope downward because, if utility is to remain the same at all points along the curve, a reduction in the quantity of the good on the vertical axis must be counterbalanced by an increase in the quantity of the good on the horizontal axis (or vice versa).

A set of indifference curves can be upward sloping if we violate assumption number three; more is preferred to less. When a set of indifference curves is upward sloping, it means one of the goods is a “bad” in that the consumer prefers less of the good rather than more of the good.

Definition: An indifference curve is a graph showing combination of two goods that give the consumer equal satisfaction and utility. Each point on an indifference curve indicates that a consumer is indifferent between the two and all points give him the same utility.

The slope of the indifference curve is called the marginal rate of substitution , which declines as the quantity of X increases relative to the quantity of Y. Of course, the amounts of commodities X and Y that the individual will be able to consume depends on the level of that person’s income.

(1) Indifference Curves are Negatively Sloped: It slopes downward because as the consumer increases the consumption of X commodity, he has to give up certain units of Y commodity in order to maintain the same level of satisfaction.

Yes, the indifference curve can be a straight line if both the goods are perfect substitutes that is both goods provide the same level of satisfaction…

In short, the slope of the indifference curve changes because the marginal rate of substitution—that is, the quantity of one good that would be traded for the other good to keep utility constant—also changes, as a result of diminishing marginal utility of both goods.

Characteristics of Indifference Curves

• Indifference curves slop downward to the right.
• Every indifference curve to the right represents a higher level of satisfaction.
• Indifference curves cannot intersect each other.
• Indifference curve will not touch the axis.
• Indifference curves are convex to the origin.

The slope of the budget line is the amount of good 2 given up to have one more unit of good 1. The price of one unit of good 1 is P1. To have one more unit of good 1, therefore, consumption of good 2 must be reduced by P1 amount.

An indifference curve is a graphical representation of a combined products that gives similar kind of satisfaction to a consumer thereby making them indifferent. Every point on the indifference curve shows that an individual or a consumer is indifferent between the two products as it gives him the same kind of utility.

Indifference curve can never intersect each other. The two indifference curves cannot represent the same level of satisfaction they cannot intersect each other. It means only one indifference curve will pass through a given point on the indifference map. Thus two indifference curves cannot intersect at one point.