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Indifference CurvesIndifference Curves
Popsicles per week
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Which bundle, A, B, C, D, E, or F is the most preferred?Why?
A B C
DE
F
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Indifference CurvesIndifference Curves
Popsicles per week
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Which bundle is the most preferred?
A B C
DE
F
D – It is located on the indifference curve that is the farthest from the origin.
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Indifference Curves - 2Indifference Curves - 2
Popsicles per week
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Which curve on the indifference map represents the lowest level of utility?
A B C
DE
F
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Indifference Curve -2Indifference Curve -2
Popsicles per week
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Which curve on the indifference map represents the lowest level of utility?
A B C
DE
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Blue curve – It is the closest to the origin.
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Consumption BundlesConsumption Bundles
Popsicles per week
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Which bundle provides the greater satisfaction B or E?
A B C
DE
F
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Consumption BundlesConsumption Bundles
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A B C
DE
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Neither – They are on the same indifference curve.
Which bundle provides the greater satisfaction B or E?
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MRSMRS
Popsicles per week
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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 B C
DE
F
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MRSMRS
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A B C
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MRS = = 1/-3 = -1/3∆sandwiches ∆popsicles
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?
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Maximizing Level of ConsumptionMaximizing Level of Consumption
Popsicles per week
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A B C
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Let the black line represent a consumer’s budget line. Which point maximizes the consumer’s utility subject to his/hers budget constraint?
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Popsicles per week
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A B C
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C – This is where an indifference curve is tangent to the budget line.
Let the black line represent a consumer’s budget line. Which point maximizes the consumer’s utility subject to his/hers budget constraint?
Maximizing Level of ConsumptionMaximizing Level of Consumption
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Budget ConstraintBudget Constraint
Popsicles per week
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A B C
DE
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Which points are unobtainable, given the budget constraint?
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Budget ConstraintBudget Constraint
Popsicles per week
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A B C
DE
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D and F – These bundles are above the budget line, therefore, the budget is too small to purchase them.
Which points are unobtainable, given the budget constraint?
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SlopeSlope
Popsicles per week
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A B C
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What is the slope of the budget constraint?Hint, since it is a linear constraint, the slope does not change over the line.
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SlopeSlope
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A B C
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Use the X and y intercepts to find the slope given the hint.
(11-0)/(0-15) = -11/15
What is the slope of the budget constraint?
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Utility Maximizing PointUtility Maximizing Point
Popsicles per week
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A B C
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What is the slope of the indifference curve at point C?Hint: recall what slopes are equal at the tangency point.
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Utility Maximizing PointUtility Maximizing Point
Popsicles per week
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A B C
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(11-0)/(0-15) = -11/15KNOW -The slope of the indifference curve (MRS) and the slope of the budget line are the same at the tangency point.
What is the slope of the indifference curve at point C?
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Understanding Budget ConstraintsUnderstanding Budget Constraints
Popsicles per week
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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
L3
L2
L4
A
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L3
L2
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Use the idea from calculating the slope, intercept = 11 and budget =33.
We know budget / price = intercept, therefore, budget / intercept =price
33/11=$3
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?
Understanding Budget ConstraintsUnderstanding Budget Constraints
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Popsicles per week
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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
L3
L2
L4
A
Understanding Budget ConstraintsUnderstanding Budget Constraints
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Popsicles per week
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L1
L3
L2
L4
A$33
KNOW - the consumer will spend $33 at all points along line L1.
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?
Understanding Budget ConstraintsUnderstanding Budget Constraints
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Understanding Budget ConstraintsUnderstanding Budget Constraints
Popsicles per week
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L1
L3
L2
L4
A
Which line represents a 50 percent decrease in the consumer’s budget from line L1?
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Test YourselfTest Yourself
Popsicles per week
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L1
L3
L2
L4
A L4 – It is a parallel shift half the distance to the origin.
Which line represents a 50 percent decrease in the consumer’s budget from L1?
Understanding Budget ConstraintsUnderstanding Budget Constraints
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Test YourselfTest Yourself
Popsicles per week
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What happened that caused the shift from L1 (budget $33) to L3?
L1
L3
L2
L4
A
Understanding Budget ConstraintsUnderstanding Budget Constraints
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Test YourselfTest Yourself
Popsicles per week
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L1
L3
L2
L4
A 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
What happened that caused the shift from L1 (budget $33) to L3?
Understanding Budget ConstraintsUnderstanding Budget Constraints
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Your friend believes that indifference curves are upward sloping. Is she correct? Why or why not?
Thought QuestionThought Question
Thought QuestionThought Question
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.
Your friend believes that indifference curves are upward sloping. Is he correct? Why or why not?
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 UnderstandDo You Understand
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.
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 UnderstandDo You Understand
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