Which of the following statements correctly explains the

Solution

Solution

• Recall the Shape of Indifference Curves

1. Indifference curves are generally downward sloping and convex to the origin. 2. Convexity reflects the principle of a diminishing marginal rate of substitution (MRS).

• Why MRS Diminishes

1. As a consumer consumes more of good X and less of good Y, the willingness to give up Y for an extra unit of X decreases. 2. In other words, each additional unit of X provides less additional satisfaction compared to Y that’s being given up.

• Check Each Option

1. A: Increasing marginal utility is inconsistent with diminishing MRS; we usually assume diminishing marginal utility. 2. B: Correct—convexity comes from the diminishing MRS as one good is substituted for another. 3. C: Prices of goods are unrelated to the shape of indifference curves; they affect the budget line, not consumer preferences. 4. D: Corner solutions are special cases; typical consumer preferences involve interior solutions.

• Conclusion

1. The diminishing marginal rate of substitution is the key reason an indifference curve is convex to the origin. 2. Hence, Option 4 is correct.