Indifference%20Curve%20Analysis

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Indifference Curve Analysis 1. Develop
indifference curves 2. Develop budget
constraint 3. Some basic analysis a.
changes in prices b. changes in
income c. the Engels Curve 4. The
Food Stamps Problem
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Indifference curve A collection of points for
which the consumer is indifference between
each of them and some reference point.
Typically shown in the context of a two good
world on a two-dimensional graph.
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• The axiomatic approach to indifference
• curves is a search for a minimum set
• of assumptions regarding consumer
• behavior through which to generate
• indifference curves.
• Standard axioms
• More is preferred to lessnonsatiation
• Completenessall points in a relation
• Transitivity A ? B B ? C ? A ? C

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• The budget equation
• B pogOG pfF
• OG B/pog pf/pogF
• Meaning The budget equation will depict
• a curve in OG-Food space that is downward
• sloping (note its derivative pf/pog is
• negative).

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Applying calculus to find an expression for the
slope of the other curve, the indifference
curve ?OG/?F - (?U/?F) /(?U/?OG) or, using
an equivalent notation ?OG/?F - MUf/ MUog
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At an equilibrium, tangency implies that the
slope of the budget constraint equals the slope
of the indifference curve Hence,
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Consumer equilibrium requires that pf/pog MUf
/MUog or MUf /pf MUog /pog In words The
marginal utility per dollar of expenditure must
be equal for each good.
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