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indifference-curve

indifference-curve - Review of Some Concepts in...

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Review of Some Concepts in Microeconomics Consider a standard consumption-choice problem: There are two goods, A and B , with prices P A and P B , respectively. There is an individual agent who consumes both goods. By consuming C A units of good A , and C B units of good B , the agent derives utility u ( C A , C B ). The agent has an income of $ Y . Question: What is the optimal bundle ( C A , C B ) the agent should buy? 1. Preferences. The agent’s preference u ( C A , C B )—his ranking of different combinations of the two goods—can be represented by indifference curve . A person is indifferent between two different combinations of goods A and B if he does not prefer one to another. An indifference curve shows all combinations of the two goods which the agent is indifferent. 1
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Properties of indifference curves: Indifference curves usually slope downward: if the agent consumes less of good A , he needs to consume more of good B to stay indifferent.
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