Econ 281 Chapter3b - Indifference Curves 3 dimensional...

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1 Indifference Curves 3 dimensional graphs are difficult to graph and understand In practice, consumer preference is graphed using 2 goods on the X and Y axis and INDIFFERENCE CURVES Each INDIFFERENCE CURVE plots all the goods combinations that yield the same utility; that a person is indifferent between
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2 U=√2 U=2 x y Consider the utility function U=(xy) 1/2 . Each indifference curve below shows all the baskets of a given utility level. Consumers are indifferent between baskets along the same curve. 0 1 2 4 1 2
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3 U=√2 U=2 x y From the indifference curves, we know that: A ≈ B, C ≈ D C A, C B, D A and D B 0 1 2 4 1 2 A B C D
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4 1).  Completeness =>  each basket lies on  only one indifference curve  2).  Transitivity =>  indifference curves do not  cross 3).  Negative Slope =>  when a consumer  likes both goods (MU a  and MU b  are positive),  the indifference curve is downward sloping 4).  Thin curves =>  indifference curves are  not “thick”
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5 x y A B IC 1 IC 2 C B A. (different indifference curves) A ≈ C (same indifference curve) B ≈ C (same indifference curve) Therefore: B ≈ A by transitivity Contradiction!
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6 IC 1 x y Y: Preferred to A A X: Less preferred More of any good is more preferred and less of a good is less preferred, so an indifference curve cannot extend into areas X or Y; it must slope downward
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7 x y Since more is better, baskets B and C should be preferred to basket A, yet they all lie on the same indifference curve, implying indifference. • • 0 1 2 4 1 2 A B C
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8 University Of Alberta IC 1 IC 2 IC 3 North East C B A Example of “more is better” violation
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9 Example :   Goods people don’t care about Complete?
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