Question

In the two-period model, we normally graph the consumer's indifference curve in the C-C'axis. Question: Explain why the shape of the indifference curve can explain the desire of a consumer to smooth consumption over time. (Hint: If it helps, you can start by thinking of the shape of the curves when c=c' which are an extreme case.)

Answer 1

- An indifference curve is drawn on a tight spending plan constraint outline that shows the tradeoffs between two products.

- All focuses along a solitary indifference curve give a similar degree of utility. Higher indifference curves speak to more elevated levels of utility.

- Indifference curves slant descending in light of the fact that, if utility is to continue as before at all focuses along the curve, a decrease in the amount of the great on the vertical hub must be counteracted an expansion in the amount of the great on the flat pivot

- Indifference curves are more extreme on the extreme left and compliment on the extreme right, due to reducing peripheral utility

- The utility-maximizing decision along a budget constraint will be the purpose of intersection where the budget constraint contacts an indifference curve at a solitary point.

- An adjustment in the cost of any great has two impacts: a substitution impact and an income impact.

- The substitution impact inspiration urges an utility-maximizer to purchase less of what is moderately progressively costly and a greater amount of what is generally less expensive.

- The income impact inspiration urges an utility-maximizer to purchase a greater amount of the two products if utility ascents or less of the two merchandise if utility falls.