Indifference Curves

12 11 10 9 8 7 6 5 4 3 2 1 0 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 Indifference Curves Which bundle, A, B, C, D, E, or F is the most preferred? Why? A C B Ice cream sandwiches per week D E F Popsicles per week

12 11 10 9 8 7 6 5 4 3 2 1 0 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 Indifference Curves Which bundle is the most preferred? D – It is located on the indifference curve that is the farthest from the origin. A C B Ice cream sandwiches per week D E F Popsicles per week

12 11 10 9 8 7 6 5 4 3 2 1 0 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 Indifference Curves - 2 Which curve on the indifference map represents the lowest level of utility? A C B Ice cream sandwiches per week D E F Popsicles per week

12 11 10 9 8 7 6 5 4 3 2 1 0 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 Indifference Curve -2 Which curve on the indifference map represents the lowest level of utility? Blue curve – It is the closest to the origin. A C B Ice cream sandwiches per week D E F Popsicles per week

12 11 10 9 8 7 6 5 4 3 2 1 0 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 Consumption Bundles Which bundle provides the greater satisfaction B or E? A C B Ice cream sandwiches per week D E F Popsicles per week

12 11 10 9 8 7 6 5 4 3 2 1 0 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 Consumption Bundles Which bundle provides the greater satisfaction B or E? Neither – They are on the same indifference curve. A C B Ice cream sandwiches per week D E F Popsicles per week

12 11 10 9 8 7 6 5 4 3 2 1 0 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 MRS If a consumer is willing to give up 3 popsicles in exchange for 1 ice cream sandwich, what is his marginal rate of substitution at that point? A C B Ice cream sandwiches per week D E F Popsicles per week

12 11 10 9 8 7 6 5 4 3 2 1 0 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 MRS If a consumer is willing to give up 3 popsicles in exchange for 1 ice cream sandwich, what is his marginal rate of substitution at that point? A C B ∆sandwiches ∆popsicles MRS = = 1/-3 = -1/3 Ice cream sandwiches per week D E F Popsicles per week

12 11 10 9 8 7 6 5 4 3 2 1 0 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 Maximizing Level of Consumption Let the black line represent a consumer’s budget line. Which point maximizes the consumer’s utility subject to his/hers budget constraint? A C B Ice cream sandwiches per week D E F Popsicles per week

12 11 10 9 8 7 6 5 4 3 2 1 0 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 Maximizing Level of Consumption Let the black line represent a consumer’s budget line. Which point maximizes the consumer’s utility subject to his/hers budget constraint? C – This is where an indifference curve is tangent to the budget line. A C B Ice cream sandwiches per week D E F Popsicles per week

12 11 10 9 8 7 6 5 4 3 2 1 0 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 Budget Constraint Which points are unobtainable, given the budget constraint? A C B Ice cream sandwiches per week D E F Popsicles per week

12 11 10 9 8 7 6 5 4 3 2 1 0 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 Budget Constraint Which points are unobtainable, given the budget constraint? D and F – These bundles are above the budget line, therefore, the budget is too small to purchase them. A C B Ice cream sandwiches per week D E F Popsicles per week

12 11 10 9 8 7 6 5 4 3 2 1 0 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 Slope What is the slope of the budget constraint? Hint, since it is a linear constraint, the slope does not change over the line. A C B Ice cream sandwiches per week D E F Popsicles per week

12 11 10 9 8 7 6 5 4 3 2 1 0 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 Slope What is the slope of the budget constraint? Use the X and y intercepts to find the slope given the hint. (11-0)/(0-15) = -11/15 A C B Ice cream sandwiches per week D E F Popsicles per week

12 11 10 9 8 7 6 5 4 3 2 1 0 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 Utility Maximizing Point What is the slope of the indifference curve at point C? Hint: recall what slopes are equal at the tangency point. A C B Ice cream sandwiches per week D E F Popsicles per week

12 11 10 9 8 7 6 5 4 3 2 1 0 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 Utility Maximizing Point What is the slope of the indifference curve at point C? (11-0)/(0-15) = -11/15 KNOW -The slope of the indifference curve (MRS) and the slope of the budget line are the same at the tangency point. A C B Ice cream sandwiches per week D E F Popsicles per week

12 11 10 9 8 7 6 5 4 3 2 1 0 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 Understanding Budget Constraints • The original budget is represented by line L1 which amount to $33 being spent. What is the price of ice cream sandwiches in line 1? L1 A L2 L3 Ice cream sandwiches per week L4 Popsicles per week

12 11 10 9 8 7 6 5 4 3 2 1 0 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 Understanding Budget Constraints • The original budget is represented by line L1 which amount to $33 being spent. What is the price of ice cream sandwiches in line 1? L1 A L2 Use the idea from calculating the slope, intercept = 11 and budget =33. We know budget / price = intercept, therefore, budget / intercept =price 33/11=$3 L3 Ice cream sandwiches per week L4 Popsicles per week

12 11 10 9 8 7 6 5 4 3 2 1 0 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 Understanding Budget Constraints • The budget for line L1 is $33. How much money will the consumer spend if he purchases the combination of ice cream sandwiches and popsicles found at point A? • Hint: you do not need to know the quantities of ice cream and popsicles. L1 A L2 L3 Ice cream sandwiches per week L4 Popsicles per week

12 11 10 9 8 7 6 5 4 3 2 1 0 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 Understanding Budget Constraints • The budget for line L1 is $33. How much money will the consumer spend if he purchases the combination of ice cream sandwiches and popsicles found at point A? L1 A $33 KNOW - the consumer will spend $33 at all points along line L1. L2 L3 Ice cream sandwiches per week L4 Popsicles per week

12 11 10 9 8 7 6 5 4 3 2 1 0 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 Understanding Budget Constraints • Which line represents a 50 percent decrease in the consumer’s budget from line L1? L1 A L2 L3 Ice cream sandwiches per week L4 Popsicles per week

12 11 10 9 8 7 6 5 4 3 2 1 0 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 Understanding Budget Constraints Test Yourself Which line represents a 50 percent decrease in the consumer’s budget from L1? L1 L4 – It is a parallel shift half the distance to the origin. A L2 L3 Ice cream sandwiches per week L4 Popsicles per week

12 11 10 9 8 7 6 5 4 3 2 1 0 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 Understanding Budget Constraints Test Yourself • What happened that caused the shift from L1 (budget $33) to L3? L1 A L2 L3 Ice cream sandwiches per week L4 Popsicles per week

12 11 10 9 8 7 6 5 4 3 2 1 0 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 Understanding Budget Constraints Test Yourself • What happened that caused the shift from L1 (budget $33) to L3? L1 The price of ice cream sandwiches increased to $5.50 but the price of popsicles did not change, same x-axis intercept. $33/6= $5.50 A L2 L3 Ice cream sandwiches per week L4 Popsicles per week

12 11 10 9 8 7 6 5 4 3 2 1 0 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 Thought Question Your friend believes that indifference curves are upward sloping. Is she correct? Why or why not?

Thought Question Your friend believes that indifference curves are upward sloping. Is he correct? Why or why not? He/she is incorrect. Indifference curves are downward sloping and convex to the origin. An indifference curve shows all of the possible combinations of two goods that provide the same utility (satisfaction). Since consumers always prefer more to less, an upward sloping curve would not make sense.

Do You Understand • You have the option to chose between three bundles of Mac and PC laptops. All bundles are on the same indifference curve. Do you choose the bundle with more Mac laptops, the bundle with more PC laptops, or the bundle with the combination of laptops that provide the most RAM? Why?

Do You Understand • You have the option to chose between three bundles of Mac and PC laptops. All bundles are on the same indifference curve. Do you choose the bundle with more Mac laptops, the bundle with more PC laptops, or the bundle with the combination of laptops that provide the most RAM? Why? You would not care. All bundles are equally good because they are on the same indifference curve. However, you would chose the bundle that is obtainable given your budget constraint.

Indifference Curves