If the price of X falls, the budget constraint a. shifts outward in a parallel fashion. Write down the equation for budget constraint. Plot this equation on a graph. If A is on vertical axis and R on horizontal axis, then the vertical intercept is 20 and horizontal intercept is 80. Join the two points and you will get a downward sloping budget line.
Indifference curves slope downward.
Indifference curves are convex to the origin. In other words, they are steeper in the beginning and then flatten out towards the end. Since the slope of the IC is simply the marginal rate of substitution of X for Y , therefore we can say that the marginal rate of substitution of X for Y declines as we move along the curve. This is due to the law of diminishing marginal utility. So as we get more of Y, it becomes less valuable for us and we are willing to give up less of the other good in order to get more Y. 8.