Consumers Equilibrium and Demand Test - 4

1. MU is the rate of change of TU.
2. When the MU decreases, TU increases at decreasing rate.
3. When MU becomes zero, TU is maximum. It is a saturation point.
4. When MU becomes negative, TU declines

The ordinal utility theory or the indifference curve analysis is based on four main assumptions.

1. Rational behavior of the consumer.
2. Utility is ordinal.
3. Diminishing marginal rate of substitution.
4. Consistency in choice. 

The law of diminishing marginal utility states that marginal utility declines as consumption increases. Because demand price depends on the marginal utilityobtained from a good, price also declines as consumption increases, meaning price and quantity demanded are inversely related, which is the law of demand.

An indifference curve is a graph showing combination of two goods that give the consumer equal satisfaction and utility. Each point on an indifference curveindicates that a consumer is indifferent between the two and all points give him the same utility.

flatter the curve more the elasticity,steeper the curve less the elasticity.

elasticity is diifferent from slope, slope will be same but not elasticity.

Flatter curve will have more elasticity, steeper will be less elastic.

Demand for medicine is in-elastic as it falls in category of a necessity good.

price elasticity of demand = % change in quantity demanded / % change in price,

which tends to infinity in case of horizontal demand curve

It is only option of non-necessity/mandatory good among given options.

slope is given by change in y axis / change in X axis.