Question

Assume the standard shapes and attributes of isoprofit curves and indifference curves. • • Indifference curves are convex, downward sloping and increasing in the NE direction Isoprofit curves are increasing in the SE direction and the implied labor demand curve is downward sloping A contact curve (CC) is a locus of tangency points between the labor union's indifference curves and the management's isoprofit curves. A textbook case is to draw an upward sloping contract curve. QUESTIONS: Draw a set of isoprolit curves and indifference curves that induce a contract curve (CC) that is (1) vertical, (2) Nat (= horizontal), or (3) downward sloping. Use the diagrams provided in the following pages, where a thick line is a contract curve (CC). Extra diagrams are provided for your convenience to illustrate each case.

Answer 1

* Indifference Curve :- 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.

* Isoprofit Curve :- A curve showing the combinations of two or more variables that generate the same level of profit for a firm. For a single firm an isoprofit curve can be constructed for alternative input combinations.

* Contract Curve :- The contract curve (CC) is the set of points representing final allocations of two goods between two people that could occur as a result of mutually beneficial trading between those people given their initial allocations of the goods.

Case - 1 :- Here Indifference Curve (IC) is downward sloping and Isoprofit Curve (IP) is increasing to SE direction. And "CC" represents the Contract Curve which is the locus of IC and IP. Here IC represents the labour union indifference curve and IP represents the management isoprofit curve. Here "w" and "n" represents Wage rate and Employment respectively.

Case - 2 :- Here Indifference Curve (IC) is increasing to NE direction and Isoprofit Curve (IP) is increasing to SE direction. Here "w" and "n" represents Wage rate and Employment respectively.

Case - 3 ;- Here Indifference Curve (IC) is convex to the origin and Isoprofit Curve (IP) is increasing to SE direction. Here "w" and "n" represents Wage rate and Employment respectively.