Indifference Curve Analysis 1
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Transcript of Indifference Curve Analysis 1
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Consumer Behaviour
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fig
Utility
Total and marginal utility
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Packetsof chips
TU in utils
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U t i l i t y
( u t i l s )
Daniel's utility from consuming chips (daily)
Packets of chips consumed (per day)
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Packetsof chips
TU in utils
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U t i l i t y
( u t i l s )
TU
Daniel's utility from consuming chips (daily)
Packets of chips co
nsumed (per day)
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MU in utils
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U t i l i t y
( u t i l s )
TU
Daniel's utility from consuming chips (daily)
Packets of chips cons
umed (per day)
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TU in utils
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MU in utils
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U t i l i t y
( u t i l s )
TU
MU
Daniel's utility from consuming chips (daily)
Packets of chips cons
umed (per day)
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MU
MU = DTU / DQ U t i l i t y
( u t i l s )
TU
Daniel's utility from consuming chips (daily)
Packets of chips consumed (per day)
DTU = 2
MU = DTU / DQ = 2/1 = 2
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fig
Deriving an individual
person’s demand curve
Utility
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fig
P 2
Q 2 O
P 1
Q 3 Q 1
a
P 3
c
Consumption at Q 3
where P 3 = MU b
MU, P
Q
MU = D
Deriving an individual person’s demand curve
Consumption at Q 2
where P 2 = MU
Consumption at Q 1
where P 1 = MU
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Utility
Indifference curve
analysis
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Indifference Curve Analysis Analyze how a rational consumer
chooses between two goods.
For instance, how the change in thewage rate will affect the choicebetween leisure time and work time.
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The indifference curve
An indifference curve is a line that shows allthe possible combinations of two goods
between which a person is indifferent. In other words, it is a line that shows the
consumption of different combinations of twogoods that will give the same utility
(satisfaction) to the person.
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An indifference curve for work and leisure
For instance, in
Figure a personwould receive thesame utility(satisfaction) fromconsuming 4hours of work and6 hours of leisure,as they would if they consumed 7hours of work and3 hours of leisure.
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Marginal Rate of Substitution The marginal rate of substitution is the
amount of one good (i.e. work) that has
to be given up if the consumer is toobtain one extra unit of the other good(leisure).
X Y
MRS xy
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Indifference map
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The budget constraint
Y = p x q x + p y q y
If q x = 0,
Spends Y/p y on Y
If q y = 0, Spends Y/p x on X
x y
x
y y q p
p
Y pq
1
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A change in consumer income and
the budget line
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Reduction in price of X
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Equilibrium of the consumer
Slope of IC,
MRS x,y = MU x /MU y
Slope of budget line= P x /P y
MRS x,y = P x /P y
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1. If an individual consumers utility
function is U = XY. Money income isRs.20, while the prices are Px= Rs.2 and
Py = Rs.8, determine the utility
maximizing choice.