6A.1 Indifference Curves Flashcards
What is an indifference curve?
This curve, called an indifference curve, shows all combinations of products that yield Hugh the same utility.
The consumer is indifferent between the combinations indicated by any two points on one indifference curve.
What do the points above the curve show?
Any points above the curve show combinations of food and clothing that Hugh prefers to points on the curve.
Inspection of the graph shows that any point above the curve will be superior to some points on the curve in the sense that it will contain both more food and more clothing than those points on the curve.
However, because all points on the curve are equal in Hugh’s eyes, any point above the curve must be superior to all points on the curve.
What do points below the indifference curve represent?
By a similar argument, all points below and to the left of the curve represent bundles that are inferior to bundles represented by points on the curve.
Any point above an indifference curve is preferred to any point along that same indifference curve; any point on the curve is preferred to any point below it.
What is MRS?
The marginal rate of substitution (MRS) is the amount of one product that a consumer is willing to give up to get one more unit of another product and remain indifferent.
What is the first basic assumption of indifference theory?
The first basic assumption of indifference theory is that the algebraic value of the MRS between two goods is always negative.
What dose a negative MRS mean?
A negative MRS means that to increase consumption of one product, Hugh is prepared to decrease consumption of a second product.
How is the negative value of the MRS indicated graphically?
The negative value of the marginal rate of substitution is indicated graphically by the negative slope of indifference curves.
What is the Hypothesis of diminishing marginal rate of substitution?
This example illustrates the hypothesis of diminishing marginal rate of substitution. The less of one product, A, and the more of a second product, B, that the consumer has already, the smaller the amount of A that the consumer will be willing to give up to get one additional unit of B.
The hypothesis says that the marginal rate of substitution changes when the amounts of two products consumed change.
How is the hypothesis of diminishing marginal rate of substitution represented graphically?
The graphical expression of this hypothesis is that any indifference curve becomes flatter as the consumer moves downward and to the right along the curve.
What is the second basic assumption of indifference theory?
Diminishing MRS is the second basic assumption of indifference theory.
What is a set of indifference curves called?
A set of indifference curves is called an indifference map,
What do economist mean when they say that a consumer’s preferences are given?
When economists say that a consumer’s preferences are given, they do not mean that the consumer’s current consumption pattern is given; rather, they mean that the consumer’s entire indifference map is given.
What dose an indifference mat consist of?
An indifference map consists of a set of indifference curves. All points on a particular curve indicate alternative combinations of food and clothing that give Hugh equal utility. The farther the curve is from the origin, the higher is the level of utility it represents.
