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Best Indifference Curves
Best Indifference Curves
good y
The amount
of good y a
consumer
may have is
measured
vertically
good x
The amount of good x is measured on the horizontal
axis.
This type of diagram is used extensively when
considering the behavior of consumers.
Indifference curves - definition
x
Indifference curves - feature 1
1
Indifference curves - feature 2
y
You can tell that point A has
less x than at B. As the
A
individual takes even one less
unit of x from either point A or
B B, some y must be given in
return.
But more is given in return if
point A is the initial point.
x
The point is the less you have of something(like x at
point A compared to point B), the more of other things
you must be given in return to compensate for the loss of
the one unit, assuming the same level of utility is
obtained. 1
Indifference curves - feature 2
The marginal rate of substitution(MRS) is the amount
of y given in return for the one unit of x, while
maintaining the same level of utility.
We can think of the MRS as a fraction:
MRS=absolute value of
(change in y)/(change in x) .
In this sense, the MRS is the absolute value of the
slope of the curve at various points. Note the slope
changes from point to point. In absolute value the
fraction gets smaller the farther down the curve one
moves. This is another way of saying the curve gets
flatter.
1
feature 2
In general, it is assumed that consumers value additional units
of a good less and less the more they have of the good. (Or
you could say when consumers give up good x they require
more and more of good y the less of good x they start with.)
The indifference curve gets flatter.
This notion is summarized with the phrase – diminishing
marginal rates of substitution.
1
y Indifference curves - feature 3
Indifference Map
Every point in the graph
has one, and only one,
indifference curve running
through it.
Curves farther out from
the origin have more
utility.
x So, the consumer can
compare every bundle and
make a determination of
preference or indifference.
1
y Indifference curves - feature 4
1
Indifference curves - feature 5
y
Mr. A
Mr. B
x
Note how Mr. A has a steeper curve than Mr. B. From the
point where the curves cross if both give up a unit of
x, note how Mr. A has to be given more y to
make up for the loss of x than Mr. B. Mr. A is said to have
a relatively strong preference for x because he needs much
more y in return for the one unit of x given up.
1
A math example of a utility function might be
U = sqrt(XY) – this means utility is a function of the square root of
the product of the amount of x and the amount of y a person would
get.
To get an indifference curve pick a value of U. Let’s say U = 4.
Then some points on the indifference curve would be
X Y
16 1
1 16
4 4
8 2
2 8 1
indifference curve when U = 16
20
15 1, 16
10 y
Y
2, 8
5 4, 4
8, 2 16, 1
0
0 5 10 15 20
X