Rita broke open her piggy bank one day. It consisted of five rupee coins and 5 rupee notes. Her mother played a game with her in which Rita had to give up one five rupee coin in order to obtain one additional 5 rupee note. Rita exchanged 10 five rupee coins with the Rs 5 notes. If we make an indifference curve in such a case, what will be the shape?
Answer & explanation
Correct answer: option 4
The correct answer is option 4: Straight & downward sloping
For Rita, it hardly matters whether she gets a five rupee coin or a five rupee note. So, irrespective of how many five rupee notes she has, she will sacrifice only one five rupee coin for a five rupee note. So, these two commodities are perfect substitutes for Rita and indifference curve depicting these will be a downward sloping straight line because marginal rate of substitution for perfect substitutes is constant.
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In this case, Rita is exchanging 5 rupee coins for 5 rupee notes, both of which have equal monetary value.
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Since 1 coin = 1 note in terms of value, the rate of substitution is constant.
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An indifference curve shows all combinations of two goods that give the consumer the same level of satisfaction.
Key points:
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Constant rate of substitution → The indifference curve will be a straight line.
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Since Rita gives up coins to get notes (and vice versa), more of one means less of the other → the line will be downward sloping.