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 CobbDouglas 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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 Spring '07
 Cheng
 Utility, Substitute good, Transitivity

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