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IAI Actuarial Core Principles · Business Economics · Consumer demand and behaviour

Which statement about indifference curves is correct under the standard assumptions of consumer theory?

Indifference curves further from the origin represent higher utility because consumers prefer more to less. Curves cannot cross, utility is constant along any one curve, and convexity reflects a diminishing marginal rate of substitution.

  1. AIndifference curves for one consumer can intersect if the goods are inferior
  2. BCurves further from the origin represent higher utility, given that more is preferred to lessCorrect
  3. CAlong an indifference curve, utility rises as the consumer substitutes one good for the other
  4. DConvexity means the marginal rate of substitution rises as more X is consumed
  5. A budget line is an indifference curve when prices are constant

Explanation

With non-satiation, bundles with more of both goods are preferred, so curves farther from the origin give higher utility. Curves cannot intersect, because that would violate transitivity. Utility is constant along a curve, and convexity means the MRS diminishes as more X is consumed.

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