What is the meaning of utility maximization?
Utility maximization is the concept that individuals and organizations seek to attain the highest level of satisfaction from their economic decisions.
What is meant by indifference curve?
An indifference curve shows a combination of two goods that give a consumer equal satisfaction and utility thereby making the consumer indifferent. Along the curve, the consumer has an equal preference for the combinations of goods shown—i.e. is indifferent about any combination of goods on the curve.
How is utility maximized under indifference theory?
To maximize utility, a consumer chooses a combination of two goods at which an indifference curve is tangent to the budget line. At the utility-maximizing solution, the consumer’s marginal rate of substitution (the absolute value of the slope of the indifference curve) is equal to the price ratio of the two goods.
What’s the difference between indifference curve and utility?
The main difference between Utility analysis and Indifference curve analysis is that in utility analysis, the consumer behaviour is discussed with the commodities independent of each other whereas, in Indifference curve analysis, the commodities can be the substitute, complementary and unrelated goods.
How do you do utility maximization?
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.
What is the condition for utility maximization?
The condition for maximizing utility—consume where the ratios of marginal utility to price are equal—holds regardless. The utility-maximizing condition is not that consumers maximize utility by equating marginal utilities.
What is ISO utility curve?
An isoquant curve is a concave-shaped line on a graph, used in the study of microeconomics, that charts all the factors, or inputs, that produce a specified level of output.
Why are indifference curves convex?
Indifference curves are convex to the origin because as the consumer begins to increase his or her use of one good over another, the curve represents the marginal rate of substitution. The marginal rate of substitution is the rate at which a consumer gives up one good for another.
What is indifference curve and indifference map?
Definition: The Indifference Map is the graphical representation of two or more indifference curves showing the several combinations of different quantities of commodities, which consumer consumes, given his income and the market price of goods and services.
What are indifference curves and their properties?
The four properties of indifference curves are: (1) indifference curves can never cross, (2) the farther out an indifference curve lies, the higher the utility it indicates, (3) indifference curves always slope downwards, and (4) indifference curves are convex.