Indifference Curve Analysis 1

8/4/2019 Indifference Curve Analysis 1

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Consumer Behaviour



fig

Utility

Total and marginal utility



fig

-2

0

2

4

6

8

10

12

14

16

0 1 2 3 4 5 6

Packetsof chips

TU in utils

01

23456

07

1113141413

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)



fig-2

0

2

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16

0 1 2 3 4 5 6

Packetsof chips

TU in utils

012345

6

07

11131414

13

U t i l i t y

( u t i l s )

TU


Packets of chips co

nsumed (per day)



fig-2

0

2

4

6

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10

12

14

16

0 1 2 3 4 5 6

Packetsof chips

TU in utils

012345

6

07

11131414

13

MU in utils

-74210

-1

U t i l i t y

( u t i l s )

TU


Packets of chips cons

umed (per day)



fig-2

0

2

4

6

8

10

12

14

16

0 1 2 3 4 5 6

Packetsof chips

TU in utils

012345

6

07

11131414

13

MU in utils

-74210

-1

U t i l i t y

( u t i l s )

TU

MU


Packets of chips cons

umed (per day)



fig-2

0

2

4

6

8

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0 1 2 3 4 5 6

MU

MU = DTU / DQ U t i l i t y

( u t i l s )

TU


Packets of chips consumed (per day)

DTU = 2

MU = DTU / DQ = 2/1 = 2



fig

Deriving an individual

person’s demand curve

Utility



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



Utility

Indifference curve

analysis



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.



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.



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.



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



Indifference map



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



A change in consumer income and

the budget line



Reduction in price of X



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



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.

Indifference Curve Analysis 1

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