ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Hicks and Allen were British economist who collaborated with each other to develop the theory of ordinal utility in 1934. The theory describes that the consumer derives utility as high or low when they take rational decision while purchasing a commodity.

Detailed explanation-2: -In the Hicks-Allen method of substitution we remove the income effect by introducing taxation. We do this so that we can keep the consumer on his/her original indifference curve. This method of the substitution effect allows us to separate the income effect and substitution effect.

Detailed explanation-3: -The basic tool of Hicks-Allen ordinal analysis of demand is the indifference curve which represents all those combinations of goods which give same level of satisfaction to the consumer. Since all the combinations on an indifference curve give equal satisfaction to the consumer, he will be indifferent between them.

Detailed explanation-4: -Alfred Marshall and his admirers presented the Cardinal Utility approach, and Hicks and Allen pioneered the Ordinal Utility idea.

Detailed explanation-5: -The basic tool of Hicks-Allen ordinal analysis of demand is the indifference curve that represents all those combinations of goods that give same satisfaction to the consumer. In other words, all combinations of the goods lying on a consumer’s indifference curve are equally preferred by him.