# Indifference Curves and Marginal Rate of Substitution Homework Answers

Economics is all about demand and supply of goods and services. It studies how an average consumer reacts to a given scenario of goods supply. Indifference curves play an important role in analyzing consumer behavior.
What is indifference curve?
An indifference curve is used to represent two combinations of two different goods where consumers are indifferent as to which one to select. It is a part of macroeconomic studies. It is based on the assumption that at some point consumers become indifferent to selection of goods which offer same benefits.
For example, suppose a child is given a basket having two soft toys and one mechanical toy. In another basket, there are two mechanical toys and one soft toy. If he is asked to choose one of these, he will be indifferent about choosing. It depicts the indifference of consumers towards goods that similar and yield same benefits. Indifference curves and marginal rate of substitution homework answers are based on this theory.
Understanding marginal rate of substitution
This topic is closely related to indifference curve analysis. This theory is based on the presumption that consumers are willing to exchange the goods they use for a new one which is equally good, in certain conditions. This is used to analyze consumer behavior. It is calculated as the relation between two goods with equal utility.
Uses of indifference curve analysis
Indifference curve study is a part of economics curriculum at higher levels. Knowing its varied uses will help students with indifference curves and marginal rate of substitution homework answers.

• Judging competitor reactions:

Indifference curves show the relation between two goods having same characters. It helps companies to decide about pricing policy with respect to that of the competitors. They can analyze how a rise or fall in their prices will affect the demand for competitorâ€™s products.

• Subsidy effects:

Government offers price subsidy on various goods in an attempt to uplift the poor sections of society. Price subsidy creates difference in prices of goods in same category having same utility. Indifference curve study can be useful in understanding how these subsidies affect the buying choices of poorer sections.

• Exchange of goods:

Indifference curves and marginal rate of substitution homework answers help to study how two persons possessing different goods can exchange it such a way as is satisfactory for both. Plotting the indifference curve of both goods will help in this. They will be willing to exchange goods at the point where marginal rate of substitution for both goods is equal to their price ratio.

• Attain optimum production:

The aim of all manufacturers will be to attain the optimum level of production where cost is minimized. A study of indifference analysis is helpful in doing this.

• Study rationing schemes:

There are several kinds of rationing schemes. In one, fixed quantity of specified goods is allocated to all, irrespective of their preference. In another scheme, individuals can buy quantities as per their choice. Indifference curve analysis will show the pros and cons of both the schemes.Â  Â

• Measuring standard of living:

Standard of living of individuals in a society is greatly determined by their choice in commodities. A study of indifference curve will help to ascertain the cost of living in a country or a specified area.

• Taxation purposes:

Tax policies of a country are determined by their economists. They study several aspects including marginal substitution rates before fixing rates of direct and indirect taxes.
Limitations of indifference analysis
Though useful in many ways, this technique is prone to some flaws.

• It is assumed that all consumers are familiar with price schemes and subsidies. This may not be so in many cases.
• It analyses the choice of only two goods at a time. There is no scope for comparing buying decisions of multiple commodities simultaneously.
• The theory assumes that all consumers behave rationally. Sometimes, buying decision is made irrationally, or on emotional factors. A consumer maybe attached to a particular brand for emotional reasons. This is totally ignored in the study.
• Buying behaviour of consumers may differ widely in unstable economic conditions. Indifference analysis takes into account only the normal fiscal scenario.
• It is microeconomic in nature and cannot be used to study comparisons of a whole group of commodities.

Why are indifference curves and marginal rate of substitution homework answers nagging for students?
Uses of this theory are varied. This theory is interesting from academic point of view also. Nevertheless, study of indifference curves is disliked by many students.

• Complex terms and theories:

The theories in indifference analysis are surely not meant for layman. It requires certain basic level of expertise to understand how the curves are formed and where they are headed. Students might find it discouraging unless they have a genuine interest in theories.

This is another deterrent for some students. Economics is no longer about simple theories. It has lots of mathematical and statistical applications which get on the nerves of some students.

• Practical problems:

Till the theory part, most do moderately well. But when it comes to solving practice problems, their grades stagger. The reason for this is not connecting theory with practice. In indifference curve study, you cannot afford to study items separately in boxes. Coordination is the key to solving difficult problems.

• Lots of assumptions:

This complaint is very genuine. Indifference studies are based on serious assumptions. It is assumed that consumers will behave in a particular manner under some circumstances. Many students ask, â€˜what is the guarantee that a customer will definitely buy this commodity only? He can change his decision on the spur of a moment.â€™ True, but without assuming things, you cannot move forward in economics.