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Indifference Curve Analysis 1. Develop indifference curves 2. Develop budget constraint

Indifference Curve Analysis 1. Develop indifference curves 2. Develop budget constraint

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## Indifference Curve Analysis 1. Develop indifference curves 2. Develop budget constraint

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**Indifference Curve Analysis**1. Develop indifference curves 2. Develop budget constraint 3. Some basic analysis: a. changes in prices; b. changes in income; c. the Engels Curve 4. The Food Stamps Problem**Indifference curve:**A collection of points for which the consumer is indifference between each of them and some reference point. Typically shown in the context of a two good world on a two-dimensional graph.**The axiomatic approach to indifference**• curves is a search for a minimum set • of assumptions regarding consumer • behavior through which to generate • indifference curves. • Standard axioms: • More is preferred to less—nonsatiation • Completeness—all points in a relation • Transitivity– A B; B C; A C**These two sets of indifference curves represent people**who differ in their relative willingness to trade food for medicine. Which one is hungry? Careful.**The budget equation:**• B = pogOG + pfF • OG = B/pog – pf/pogF Meaning: The budget equation will depict a curve in OG-Food space that is downward sloping (note: its derivative –pf/pog is negative).**Applying calculus to find an expression**for the slope of the other curve, the indifference curve: OG/F = - (U/F) /(U/OG) or, using an equivalent notation: OG/F = - MUf/MUog**At an equilibrium, tangency implies that**the slope of the budget constraint equals the slope of the indifference curve: Hence,**Consumer equilibrium requires that**pf/pog = MUf /MUog or MUf /pf = MUog /pog In words: The marginal utility per dollar of expenditure must be equal for each good.**End of the portion prior to**the Group project on the Food Stamps Problem.**Discussion Questions:**• Would this analysis make good policy? • What do we know about the behavior of • the poor and how do we know this? • If we would say that giving cash would • make bad policy, is one’s criticism based • on an efficiency argument? An equity • argument? A paternalistic argument?