MicroMinor1402 Lecture02

Lecture 02: Preferences and Utility
44719-Microeconomics for Minor Students

Lecture 02:
PREFERENCES AND UTILITY
(Chapter 3 NS-Chapters 3,4 V)
Saeed Tajrishy
Graduate School of Management and Economics
Sharif University of Technology
Fall 2023
Saeed Tajrishy-GSME SUT Slide 1 of 55 Microeconomic For Minor Students-Fall 2023

So far…
• Economics is the study of how scarce resources are allocated among
alternative uses
• economists use simple models to understand the process
• The most commonly used economic model is the supply-demand model
• shows how prices serve to balance production costs and the willingness of buyers
to pay for these costs
• The supply-demand model is only a partial-equilibrium model
• a general equilibrium model is needed to look at many markets together
• Testing the validity of a model is a difficult task
• are the model’s assumptions reasonable?
• does the model explain real-world events?

This lecture…
• Axioms of rational choices

• Utility
• Trades and substitution
• Mathematics of indifference curve
• Examples of utility functions
• The many-good case

Axioms of Rational Choices

Axioms of Rational Choice

• Completeness
• if A and B are any two situations, an individual can
always specify exactly one of these possibilities:
• A is preferred to B
• B is preferred to A
• A and B are equally attractive


• Transitivity
• if A is preferred to B, and B is preferred to C, then A is
preferred to C
• assumes that the individual’s choices are internally
consistent


• Continuity
• if A is preferred to B, then situations suitably “close to” A
must also be preferred to B
• used to analyze individuals’ responses to relatively small
changes in income and prices
• Why ? mathematical development

Rational Choice
• Optimize for their decisions
• Scarcity
• Opportunity cost
• Trade-off
• Cost-benefit
• Expected Value
• Discounting

Examples
• Picking up children in a kindergarten :
• Gneezy, Uri, and Aldo Rustichini. "A fine is a price." The journal of legal studies 29, no. 1
(2000): 1-17.
• Gasoline prices due to the low cost of oil extraction
• Construction of highways to control urban traffic (Sterman,2000)
• Intensify punishment to reduce crime (Gary Becker 1974-Nobel 1992)
• Becker, G. S. (1968). Crime and Punishment: An Economic Approach. Journal of Political
Economy, 76(2), 169-217.
• Higher fertility in border areas and religious minorities in Iran and in ancient times
• Becker, G. S. (2009). A Treatise on the Family. Harvard university press.
• Becker, G. S., & Lewis, H. G. (1973). On the Interaction between the Quantity and
Quality of Children. Journal of political Economy, 81(2, Part 2), S279-S288.
• Efficiency wages(Shapiro& Stiglitz, 1984)
• How is smoking rational?

Nobel 1992-Gary Becker

• Gary Stanley Becker (December 2, 1930 – May 3, 2014) was an
American economist who received the 1992 Nobel Memorial
Prize in Economic Sciences. He was a professor of economics
and sociology at the University of Chicago.
• A 2011 survey of economics professors named Becker their
favorite living economist over the age of 60, followed by
Kenneth Arrow and Robert Solow.
• Becker was one of the first economists to analyze topics that
had been researched in sociology, including racial
discrimination, crime, family organization, and rational
addiction. He argued that many different types of human
behavior can be seen as rational and utility maximizing.
• His approach included altruistic behavior of human behavior by
defining individuals' utility appropriately. He was also among
the foremost exponents of the study of human capital.
According to Milton Friedman, he was "the greatest social
scientist who has lived and worked" in the second part of the
twentieth century.

Joseph Stiglitz

Utility

Utility
• Given these assumptions, it is possible to show that
people are able to rank in order all possible
situations from least desirable to most
• Economists call this ranking utility
• if A is preferred to B, then the utility assigned to A exceeds
the utility assigned to B
𝑈(𝐴) > 𝑈(𝐵)

Utility
• Utility rankings are ordinal in nature
• they record the relative desirability of commodity bundles
• Because utility measures are not unique, it makes no
sense to consider how much more utility is gained
from A than from B
• It is also impossible to compare utilities between
people

Utility
• Utility is affected by the consumption of physical
commodities, psychological attitudes, peer group
pressures, personal experiences, and the general
cultural environment
• Economists generally devote attention to
quantifiable options while holding constant the
other things that affect utility
• ceteris paribus assumption

Utility
• Assume that an individual must choose among
consumption goods x1, x2,…, xn
• The individual’s rankings can be shown by a utility
function of the form:
𝑈𝑡𝑖𝑙𝑖𝑡𝑦 = 𝑈(𝑥1, 𝑥2, … , 𝑥𝑛; 𝑜𝑡ℎ𝑒𝑟 𝑡ℎ𝑖𝑛𝑔𝑠)
• this function is unique up to an order-preserving

transformation

Other arguments of utility functions

• Wealth(w) U(w)
• Labor-leisure U(c, h)
c : consumption , h : hours of non-work time
• Different periods U(C1, C2)

C1 : consumption in this period , C2 : consumption in the next period

Economic Goods
• In the utility function, the x’s are assumed to be
“goods”
• more is preferred to less
Quantity of y
Preferred to x*, y*
y*
?
Worse
than
x*, y* Quantity of x
x*
Trades and Substitution

Indifference Curves
• An indifference curve shows a set of consumption
bundles among which the individual is indifferent
Quantity of y
Combinations (x1, y1) and (x2, y2)
provide the same level of utility
y1
y2
U1
Quantity of x
x1 x2
Marginal Rate of Substitution

• The negative of the slope of the indifference curve
at any point is called the marginal rate of
substitution (MRS)
Quantity of y
𝑑𝑦
𝑀𝑅𝑆 = − ቤ
𝑑𝑥 𝑈=𝑈
1
y1
y2
U1
Quantity of x
x1 x2
Marginal Rate of Substitution

• MRS changes as x and y change
• reflects the individual’s willingness to trade y for x
Quantity of y At (x1, y1), the indifference curve is steeper.

The person would be willing to give up more
y to gain additional units of x
At (x2, y2), the indifference curve

is flatter. The person would be
y1 willing to give up less y to gain
additional units of x
y2
U1
Quantity of x
x1 x2
Indifference Curve Map

• Each point must have an indifference curve through it
Quantity of y
Increasing utility
U3 U1 < U2 < U3
U2
U1
Quantity of x

Transitivity
• Can any two of an individual’s indifference curves
intersect?
Quantity of y
C
B
U2
A U1
Quantity of x

Transitivity
• Can any two of an individual’s indifference curves
intersect?
The individual is indifferent between A and C.

Quantity of y The individual is indifferent between B and C.
Transitivity suggests that the individual
should be indifferent between A and B
But B is preferred to A
C because B contains more
B
U2 x and y than A
A U1
Quantity of x

Convexity
• A set of points is convex if any two points can be joined by a
straight line that is contained completely within the set
The assumption of a diminishing MRS is

equivalent to the assumption that all
combinations of x and y which are
preferred to x* and y* form a convex set

Convexity
• If the indifference curve is convex, then the combination (x1 +
x2)/2, (y1 + y2)/2 will be preferred to either (x1,y1) or (x2,y2)
This implies that “well-balanced” bundles are preferred

to bundles that are heavily weighted toward one
commodity

Mathematics of Indifference Curve

Utility and the MRS

• Suppose an individual’s preferences for
hamburgers (y) and soft drinks (x) can be
represented by
utility = 10 = 𝑥⋅𝑦
• Solving for y, we get
100
𝑦 =
𝑥
• Solving for MRS = -dy/dx:
𝑑𝑦 100
MRS = −
𝑑𝑥
=
𝑥2

Utility and the MRS

𝑑𝑦 100
𝑀𝑅𝑆 = − = 2
𝑑𝑥 𝑥
• Note that as x rises, MRS falls
• when x = 5, MRS = 4
• when x = 20, MRS = 0.25

Marginal Utility
• Suppose that an individual has a utility function of
the form
𝑈𝑡𝑖𝑙𝑖𝑡𝑦 = 𝑈(𝑥, 𝑦)
• The total differential of U is
𝜕𝑈 𝜕𝑈
𝑑𝑈 = 𝑑𝑥 + 𝑑𝑦
𝜕𝑥 𝜕𝑦
• Along any indifference curve, utility is

constant (dU = 0)

Deriving the MRS

• Therefore, we get:
𝜕𝑈
𝑑𝑦
𝑀𝑅𝑆 = − ቤ = 𝜕𝑥
𝑑𝑥 U=constant 𝜕𝑈
𝜕𝑦
• MRS is the ratio of the marginal utility of x to

the marginal utility of y

Diminishing Marginal Utility and the

MRS
• Intuitively, it seems that the assumption of
decreasing marginal utility is related to the concept
of a diminishing MRS
• diminishing MRS requires that the utility function be
quasi-concave:
• this is independent of how utility is measured
• diminishing marginal utility depends on how utility is
measured
• Thus, these two concepts are different

Convexity of Indifference Curves

• Suppose that the utility function is
Utility = 𝑥⋅𝑦
• We can simplify the algebra by taking the

logarithm of this function
𝑈 ∗ (𝑥, 𝑦) = ln[𝑈(𝑥, 𝑦)] = 0.5 ln 𝑥 + 0.5 ln 𝑦


• Thus,
𝜕𝑈 ∗ 0.5
𝜕𝑥 𝑥 𝑦
𝑀𝑅𝑆 = = =
𝜕𝑈 ∗ 0.5 𝑥
𝜕𝑦 𝑦


• If the utility function is
𝑈(𝑥, 𝑦) = 𝑥 + 𝑥𝑦 + 𝑦
• There is no advantage to transforming this utility

function, so
𝜕𝑈
𝜕𝑥 1+𝑦
𝑀𝑅𝑆 = =
𝜕𝑈 1 + 𝑥
𝜕𝑦


• Suppose that the utility function is
utility = 𝑥2 + 𝑦2
• For this example, it is easier to use the

transformation
𝑈 ∗ (𝑥, 𝑦) = [𝑈(𝑥, 𝑦)]2 = 𝑥2 + 𝑦2


• Thus,
𝜕𝑈 ∗
𝜕𝑥 2𝑥 𝑥
𝑀𝑅𝑆 = = =
𝜕𝑈 ∗ 2𝑦 𝑦
𝜕𝑦

Examples of Utility Functions


• Cobb-Douglas Utility
𝑢𝑡𝑖𝑙𝑖𝑡𝑦 = 𝑈(𝑥, 𝑦) = 𝑥𝑦
where  and  are positive constants each less than 1
• The relative sizes of  and
 indicate the relative importance
of the goods.


• Cobb-Douglas Utility
• We can normalize these parameters:
𝑈 𝑥, 𝑦 = 𝑥𝑦1−𝛿
𝛼 𝛽
where  = (𝛼+𝛽)
,1 −𝛿 =
(𝛼+𝛽)


• Perfect Substitutes
𝑢𝑡𝑖𝑙𝑖𝑡𝑦 = 𝑈(𝑥, 𝑦) = 𝑥 + 𝑦
The indifference curves will be linear.

The MRS will be constant along the
indifference curve.


• Perfect Complements
𝑈𝑡𝑖𝑙𝑖𝑡𝑦 = 𝑈(𝑥, 𝑦) = min(𝑥, 𝑦)
The indifference curves will be

L-shaped. In superfluous amounts if
αx = βy only by choosing more
of the two goods together can utility
be increased.


• CES Utility (Constant elasticity of substitution)
A function that permits a variety of indifference curve:
1
𝑈(𝑥, 𝑦) = 𝑥 + 𝑦 𝛿
Where ≤1, ≠0.

• using the monotonic transformation
U* = U /  we have:


𝑥𝛿 𝑦𝛿
𝑢𝑡𝑖𝑙𝑖𝑡𝑦 = 𝑈 𝑥, 𝑦 = +
𝛿 𝛿
when   0 and
𝑢𝑡𝑖𝑙𝑖𝑡𝑦 = 𝑈(𝑥, 𝑦) = ln 𝑥 + ln 𝑦
when  = 0
• Perfect substitutes   = 1
• Cobb-Douglas   = 0
• Perfect complements   = -


• The elasticity of substitution () is equal to 1/(1 - )
• Perfect substitutes   = 
• Fixed proportions   = 0

Homothetic Preferences
• If the MRS depends only on the ratio of the
amounts of the two goods, not on the quantities
of the goods, the utility function is homothetic
• Perfect substitutes  MRS is the same at every point
• Perfect complements  MRS =  if y/x > /,
undefined if y/x = /, and MRS = 0 if y/x < /

Homothetic Preferences
• For the general Cobb-Douglas function, the MRS can be
found as
𝜕𝑈 𝛼−1 𝑦 𝛽
𝜕𝑥 𝛼𝑥 𝛼 𝑦
𝑀𝑅𝑆 = = 𝛼 𝛽−1 = ⋅
𝜕𝑈 𝛽𝑥 𝑦 𝛽 𝑥
𝜕𝑦
• The importance of homothetic functions is that one

indifference curve is much like another.

Nonhomothetic Preferences
• Some utility functions do not exhibit homothetic preferences
𝑢𝑡𝑖𝑙𝑖𝑡𝑦 = 𝑈(𝑥, 𝑦) = 𝑥 + ln 𝑦
𝜕𝑈
𝜕𝑥 1
𝑀𝑅𝑆 = = =𝑦
𝜕𝑈 1
𝜕𝑦 𝑦
• it is independent of the quantity of x consumed !

The Many-Good Case

Multigood Indifference Surfaces

• Suppose utility is a function of n goods given by
𝑢𝑡𝑖𝑙𝑖𝑡𝑦 = 𝑈(𝑥1, 𝑥2, … , 𝑥𝑛)
• We will define an indifference surface as being the set of points in n
dimensions that satisfy the equation
𝑈(𝑥1, 𝑥2, … 𝑥𝑛) = 𝑘
where k is any preassigned constant

Multigood Indifference Surfaces

• If the utility function is quasi-concave, the set of points for which U  k will be
convex
• all of the points on a line joining any two points on the U = k indifference
surface will also have U  k

The Many-Good Case

• Suppose utility is a function of n goods given by
𝑢𝑡𝑖𝑙𝑖𝑡𝑦 = 𝑈 𝑥1, 𝑥2, … , 𝑥𝑛
• The total differential of U is
𝜕𝑈 𝜕𝑈 𝜕𝑈
𝑑𝑈 = 𝑑𝑥1 + 𝑑𝑥2 +. . . + 𝑑𝑥𝑛
𝜕𝑥1 𝜕𝑥2 𝜕𝑥𝑛

The Many-Good Case

• We can find the MRS between any two goods by
setting dU = 0
𝜕𝑈 𝜕𝑈
𝑑𝑈 = 0 = 𝑑𝑥𝑖 + 𝑑𝑥𝑗
𝜕𝑥𝑖 𝜕𝑥𝑗
• Rearranging, we get
𝜕𝑈
𝑑𝑥𝑗 𝜕𝑥𝑖
𝑀𝑅𝑆(𝑥𝑖 for 𝑥𝑗 ) = − =
𝑑𝑥𝑖 𝜕𝑈
𝜕𝑥𝑗

The Many-Good Case
• the important point is an individual’s willingness to

trade x1 for x2 will depend not only on the quantities
of these two goods but also on the quantities of all the
other goods!

Summary

Important Points to Note:

• If individuals obey certain behavioral postulates,
they will be able to rank all commodity bundles
• the ranking can be represented by a utility function
• in making choices, individuals will act as if they were
maximizing this function
• Utility functions for two goods can be illustrated by
an indifference curve map


• The negative of the slope of the indifference curve
measures the marginal rate of substitution (MRS)
• the rate at which an individual would trade an amount of
one good (y) for one more unit of another good (x)
• MRS decreases as x is substituted for y
• individuals prefer some balance in their consumption
choices


• A few simple functional forms can capture important
differences in individuals’ preferences for two (or
more) goods
• Cobb-Douglas function
• linear function (perfect substitutes)
• fixed proportions function (perfect complements)
• CES function
• includes the other three as special cases


• It is a simple matter to generalize from two-good
examples to many goods
• studying peoples’ choices among many goods can yield
many insights
• the mathematics of many goods is not especially
intuitive, so we will rely on two-good cases to build
intuition

Extensions

EXTENSIONS : Special Preferences

Here we look at four aspects of preferences that economists
have tried to model:
(1) threshold effects

(2) quality
(3) habits and addiction
(4) second-party preferences

1) Threshold effects
- The old model : individual will always prefer commodity bundle A to B provided
U(A)U(B)
- There maybe events that cause people shift quickly from consuming bundle A to B
- In real world people may in fact be set in their ways , for example:
1- Individuals may not have especially strong opinions about what precise brand of
toothpaste they choose and may stick with what they know despite a proliferation of new
brands.
2- people may stick with an old favorite TV show even though it has declined in quality.

assume individuals make decisions as though they faced thresholds of

preference , commodity bundle A might be chosen over B only when :
𝑈 𝐴 < 𝑈(𝐵) + 
Threshold () might depend on the characteristics of the bundles being

considered or on other contextual variables.
In this case indifference curves then may be rather thick and even fuzzy!

An example : Alternative fuels
- We can use the threshold idea to examine the conditions under which individuals
will shift from gasoline to other fuels.
- The main disadvantage of using gasoline is the excessive price volatility of the
product relative to other fuels.
So switching to ethanol blends is efficient, provided that the blends do not decrease
fuel efficiency.
- But people usually use gasoline because of the threshold effect!

2) Quality
Problem: many consumption items differ widely in quality !
Approaches:
1- regard items of different quality as totally separate goods that are relatively
close substitutes; unwieldy because of the large number of goods involved!
2- utility = U(q, Q) , where q: quantity and Q: quality

- When we have variety of qualities : Quality might then be defined as an average
- may not be appropriate when the quality of new goods is changing rapidly.
(e.g., as in the case of personal computers)

3- focuses on a well-defined set of attributes of goods

and assumes that those attributes provide utility :
𝑢𝑡𝑖𝑙𝑖𝑡𝑦 = 𝑈[𝑞, 𝑎1(𝑞), 𝑎2(𝑞)]

An example : Personal computers
- It’s a rapidly changing industry so It’s incorrect to focus only on the quantity of
personal computers purchased each year because new machines are much better
than old ones (increasing about 30 percent per year over a long period).
- A person who spends $2,000 for a personal computer today buys much more utility
than did a similar consumer 5 years ago.

3) Habits and addiction

- there is the possibility that decisions made in one period will affect
utility in later periods.
- Habit : when individuals discover they enjoy using a commodity in one

period and this increases their consumption in subsequent periods.
- An extreme case is addiction to drugs, cigarettes, etc.

- assume that utility in period t depends on consumption in period t

and the total of all previous consumption of the habit-forming good x :
where

-In empirical applications it is common to model habits using only data

on current consumption and on consumption in the previous period:
where x* is some simple function of xt and xt-1, such as

x* = xt - xt-1 or x∗ = xt / xt-1 . Such functions imply that,
ceteris paribus, the higher the value of xt-1, the more xt will be
chosen in the current period.

Examples :
1) why people develop a “taste” for going to operas or playing golf.
2) studying cigarette smoking and other addictive behaviors. Some economists

show that reductions in smoking early in life can have large effects on
eventual cigarette consumption because of the dynamics in utility functions.
3) Is addictive behavior rational?

Gruber and Koszegi (2001) show that smoking can be approached as a rational,
although time-inconsistent choice.
Becker, G. S., & Murphy, K. M. (1988). A theory of rational addiction. Journal of
political Economy, 96(4), 675-700.

4) Second-party preferences
-Individuals clearly care about the well-being of other individuals (charity)
Where Uj is the utility of someone else.
For example making charitable contributions or making bequests to children cannot be

understood without recognizing the interdependence that exists among people.

We have 3 cases:
U i
U j
 0 : altruistic behavior
U i
U j
 0 : malevolent behavior
U i
U j
= 0 : usual case a middle ground between these alternative preference types

An example : Evolutionary biology and genetics
Biologists have suggested a particular form for the utility function :
Where rj : closeness of the genetic relationship between person i and

person j
rj for children and parents = 0.5 , rj for cousins =0.125

Applications : Product Positioning in Marketing
- In the field of marketing, firms wish to develop a new product with

attributes that successfully differentiate it from its competitors.
- A careful positioning of the good that takes account of both consumers

desires and the costs associated with product attributes can make the
difference between a profitable and an unprofitable product introduction.

Case 1 : breakfast cereals
- Suppose only two attributes matter to consumers—taste and Crunchiness.
- Suppose that a new breakfast cereal has two competitors—Brand X and Brand Y.
- The problem is to position the new brand in a way that it provides more utility
to the consumer while keeping the new cereal’s production costs competitive.

- If marketing surveys suggest that the typical consumer’s Market research

indicates consumers are indifferent between the characteristics of cereals X
and Y, by using Graphic Analysis , positioning a new brand at Z offers good
market prospects:

Case 2 : Hotels
- Hotel chains use essentially the same procedure in competing for business.
- The experts gather small groups of consumers and ask them to rank various
sets of hotel attributes such as check-in convenience, pools, and room
service.
- Such information allows them to construct indifference curves for these

various attributes.
- They then place its major competitors on these graphs and explores various
ways of correctly positioning its own product.
Case 3 : Complex Products

- Complex products, supplied with various factory-installed options.
- These makers not only must position their basic product among many competitors
but also must decide when to incorporate options into their designs and how to
price them.
- For example, throughout the 1980s, Japanese automakers tended to incorporate

such options as air conditioning, power windows, and sunroofs into their models.
The approach was so successful that most makers of such autos have adopted it.
- Similarly, in the personal computer market, producers such as IBM found they could
gain market share by including carefully tailored packages of peripherals (larger hard
drives, extra memory, and powerful modems) in their packages.

Thank You!
http://gsme.sharif.edu/~saeed.tajrishy/

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Lecture 02: Preferences and Utility

44719-Microeconomics for Minor Students

Saeed Tajrishy-GSME SUT Slide 1 of 55 Microeconomic For Minor Students-Fall 2023

Saeed Tajrishy-GSME SUT Slide 2 of 55 Microeconomic For Minor Students-Fall 2023

• Axioms of rational choices

Saeed Tajrishy-GSME SUT Slide 3 of 55 Microeconomic For Minor Students-Fall 2023

Axioms of Rational Choices

Saeed Tajrishy-GSME SUT Slide 4 of 55 Microeconomic For Minor Students-Fall 2023

Axioms of Rational Choice

Saeed Tajrishy-GSME SUT Slide 5 of 55 Microeconomic For Minor Students-Fall 2023

Axioms of Rational Choice

Saeed Tajrishy-GSME SUT Slide 6 of 55 Microeconomic For Minor Students-Fall 2023

Axioms of Rational Choice

Saeed Tajrishy-GSME SUT Slide 7 of 55 Microeconomic For Minor Students-Fall 2023

Saeed Tajrishy-GSME SUT Slide 8 of 55 Microeconomic For Minor Students-Fall 2023

Saeed Tajrishy-GSME SUT Slide 9 of 55 Microeconomic For Minor Students-Fall 2023

Nobel 1992-Gary Becker

Saeed Tajrishy-GSME SUT Slide 10 of 55 Microeconomic For Minor Students-Fall 2023

Saeed Tajrishy-GSME SUT Slide 11 of 55 Microeconomic For Minor Students-Fall 2023

Saeed Tajrishy-GSME SUT Slide 12 of 55 Microeconomic For Minor Students-Fall 2023

Saeed Tajrishy-GSME SUT Slide 13 of 55 Microeconomic For Minor Students-Fall 2023

Saeed Tajrishy-GSME SUT Slide 14 of 55 Microeconomic For Minor Students-Fall 2023

Saeed Tajrishy-GSME SUT Slide 15 of 55 Microeconomic For Minor Students-Fall 2023

𝑈𝑡𝑖𝑙𝑖𝑡𝑦 = 𝑈(𝑥1, 𝑥2, … , 𝑥𝑛; 𝑜𝑡ℎ𝑒𝑟 𝑡ℎ𝑖𝑛𝑔𝑠)

• this function is unique up to an order-preserving

Saeed Tajrishy-GSME SUT Slide 16 of 55 Microeconomic For Minor Students-Fall 2023

Other arguments of utility functions

• Different periods U(C1, C2)

Saeed Tajrishy-GSME SUT Slide 17 of 55 Microeconomic For Minor Students-Fall 2023

Trades and Substitution

Saeed Tajrishy-GSME SUT Slide 19 of 55 Microeconomic For Minor Students-Fall 2023

Marginal Rate of Substitution

Marginal Rate of Substitution

Quantity of y At (x1, y1), the indifference curve is steeper.

At (x2, y2), the indifference curve

Indifference Curve Map

Saeed Tajrishy-GSME SUT Slide 23 of 55 Microeconomic For Minor Students-Fall 2023

Saeed Tajrishy-GSME SUT Slide 24 of 55 Microeconomic For Minor Students-Fall 2023

The individual is indifferent between A and C.

Saeed Tajrishy-GSME SUT Slide 25 of 55 Microeconomic For Minor Students-Fall 2023

The assumption of a diminishing MRS is

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This implies that “well-balanced” bundles are preferred

Saeed Tajrishy-GSME SUT Slide 27 of 55 Microeconomic For Minor Students-Fall 2023

Mathematics of Indifference Curve

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Utility and the MRS

Saeed Tajrishy-GSME SUT Slide 29 of 55 Microeconomic For Minor Students-Fall 2023

Utility and the MRS

Saeed Tajrishy-GSME SUT Slide 30 of 55 Microeconomic For Minor Students-Fall 2023

• Along any indifference curve, utility is

Saeed Tajrishy-GSME SUT Slide 31 of 55 Microeconomic For Minor Students-Fall 2023

Deriving the MRS

• MRS is the ratio of the marginal utility of x to

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Diminishing Marginal Utility and the

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Convexity of Indifference Curves

• We can simplify the algebra by taking the

Saeed Tajrishy-GSME SUT Slide 34 of 55 Microeconomic For Minor Students-Fall 2023

Convexity of Indifference Curves

Saeed Tajrishy-GSME SUT Slide 35 of 55 Microeconomic For Minor Students-Fall 2023