indifference curves

# indifference curves - 6.a Indifference curves Bundles...

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6.a Indifference curves Bundles ·A "bundle" consists of a combination of goods that a consumer can utilize. Assuming there are only two goods, a bundle is comprised of certain amount of good X and a certain amount of good Y. For example, A number of good X and Y A number of good Y. Similarly, bundle B has X B number of good X and Y B number of good Y. Assumptions about consumer behavior 1. Completeness: A consumer can say that either A is preferred to B, B is preferred to A, or A and B are equally preferred. Shorthand notation for this will be A > B, B > A, A = B, respectively. 2. Dominance (more is preferred to less): A > B if X A is greater than X B and Y A is greater than Y B , OR if X A is greater than X B while Y A equals Y B . 3. Transitivity: if A > B and if B > C, then A > C. Utility functions and Indifference curves A utility function shows the level of utility a consumer derives from a particular bundle of X & Y. An example of a utility function is the Cobb-Douglas utility function: U = X a ·Y b U stands for a numerical value of utility and X & Y stand for the number of the goods in the bundle. Say U = X 0.5 ·Y 0.5 what combinations of X & Y (bundles) yield a utility level of 10? Bundle X Y A 1 100 B 2 50 C 3 33 1/3 D 4 25 All bundles satisfy the equation 10 = X 0.5 ·Y 0.5 . Therefore, A=B=C=D, and the consumer is indifferent between the bundles because they all yield the same level of utility. Showing these bundles on a graph forms an indifference curve. Bundle N, shown above, has more of good X than bundle B and is therefore preferred since more is

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indifference curves - 6.a Indifference curves Bundles...

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