If the consumer increases his consumption beyond X or K, total utility will fall. If he increases his consumption of X so as to reach the dotted portion of the I1 curve (horizontally from point S), he gets negative utility. If to 13
Theory Of Consumer Behavior compensate himself for this loss of utility, he increases the consumption of Y, he may be again on the dotted portion of the curve (vertically from point S). Thus the consumer may be on the concave portion of the circular curve. Since by moving to the dotted portion he gets negative utility, the effective region of the circular curve will be the convex portion. Criticisms of Indifference curve: Unrealistic assumption: Indifference curve analysis is criticized on the ground that it makes the unrealistic assumption that the consumer possesses complete knowledge of his scale of preference. Further it is criticized that as it studies only two goods but in real behavior there are many goods which we consume. Assumption of transitivity is unrealistic: Indifference curve assumes that there is transitivity on the scale of preference. But this relation is not always applied in real behavior. Tells nothing new: Indifference curve tells nothing new. It has only replaced the term preference for utility and marginal rate of substitution for marginal utility. Thus it tells nothing new. Conclusion: Though indifference curve is criticized it is helpful in making so many decisions regarding deciding the subsidy or the taxes. It is also useful to the consumers who maximize the satisfaction. Marginal Rate of Substitution (MRS): The concept of marginal rate substitution (MRS) was introduced by Dr. J.R. Hicks and Prof. R.G.D. Allen to take the place of the concept of d iminishing marginal utility . Allen and Hicks are of the opinion that it is unnecessary to measure the utility of a commodity. The necessity is to study the behavior of the consumer as to how he prefers one commodity to another and maintains the same level of satisfaction. Statement: In the words of Hicks: “The marginal rate of substitution of X for Y measures the number of units of Y that must be scarified for unit of X gained so as to maintain a constant level of satisfaction”. Marginal rate of substitution (MRS) can also be defined as: “The ratio of exchange between small units of two commodities, which are equally valued or preferred by a consumer”. “OR” The negative of the slope of an indifference curve ( IC 1 ) at some point is termed as Marginal rate of substitution (MRS) at that point. For example, there are two goods X and Y which are not perfect substitute of each other. The consumer is prepared to exchange goods X for Y. How many units of Y should be given for one unit of X to the consumer so that his level of satisfaction remains the same? The rate or ratio at which goods X and Y are to be exchanged is known as the marginal rate of substitution (MRS).
You've reached the end of your free preview.
Want to read all 20 pages?
- Winter '18
- J. Gadzik
- Utility, Equi Marginal Utility