Chapter 7A. Indifference Curve Analysis

Indifference Curve AnalysisChapter 7ACopyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.Indifference Curve AnalysisAlternative to theory of utility maximizationDifficult to measure utilityUse rankings or order of preference for productsTakes into account the consumer’s budgetDerive a demand curveLO6The Budget LineBudget LineCombinations of two products a consumer can purchase with their money incomeSlope Ratio of the price of B to the price of ALocation varies with income changesLocation varies with price changesLO6Indifference CurvesIndifference CurveCombinations of two products that yield the same amount of total utilityThe consumer is indifferent as to which combination to purchaseDownslopingConvex to the originReflects the Marginal Rate of SubstitutionLO6The Indifference MapIndifference mapSeries of indifference curves where each curve reflects different amounts of utilityEach successive curve outward reflects a higher level of utilityLO6Equilibrium at TangencyThe consumer’s equilibrium positionIndifference curve is tangent to the budget lineUtility is maximizedMRS equals the ratio of the price of B to the price of ALO6