REPRESENTING PREFERENCES WITH INDIFFERENCE CURVES

The consumer’s preferences allow him to choose among different bundles of Pepsi and pizza: If you offer the consumer two different bundles, he chooses the bundle that best suits his tastes. If the two bundles suit his tastes equally well, we say that the consumer is indifferent between the two bundles. Just as we have represented the consumer’s budget constraint graphically, we can also represent his preferences graphically. Wc do this with indifference curves. An indifference curve shows the bundles of’ consumption that make the consumer equally happy. In this case, the indifference curves show the combinations of Pepsi and pizza with which the consumer equally satisfied Figure 2 shows two of the consumer’s many indifference curves. The consumer is indifferent among combinations A, B, and C because they are all on the same curve. Not surprisingly, if the consumer’s

Figure 2, The Consumer’s Preferences
The consumer’s preferences are represented ·with indifference curves, which show the combinations of Pepsi and pizza that make the consumer equally satisfied. Because the consumer prefers more of a good, points on a higher indifference curve (12 here) are preferred to points on a lower indifference curve (II)’ {he marginal rate of substitution (MRS) shows the rate at which the consumer is willing to trade Pepsi for pizza.

consumption of pizza is reduced, say from point A to point B, consumption of Pepsi must increase to keep him equally happy. If consumption of pizza is reduced again, from point B to point C, the amount of Pepsi consumed must increase yet again. The slope at any point on an indifference curve equals the rate at which the consumer is willing to substitute one good for the other. This rate is called the marginal rate of substitution (MRS). In this case, the marginal rate of substitution measures how much Pepsi the consumer requires to be compensated for a one-unit reduction in pizza consumption. Notice that because the indifference curves are not straight lines the marginal rate of substitution is not the same at all points on a given indifference curve. The rate at which a consumer is willing to trade one good for the other depends on the amounts of the goods he is already consuming. That is, the rate at which a consumer is willing to trade pizza for Pepsi depends on whether he is hungrier or thirstier, .which in turn depends on how much pizza and Pepsi he is consuming. The consumer is equally happy at all points on any given indifference curve, but he prefers some indifference curves to others. Because he prefers more consumption to less, higher indifference curves are preferred to lower ones. In Figure 2, any point on curve 12 is preferred to any point on curve  A consumer’s set of indifference curves gives a complete ranking of the consumer’s preferences. That is we can use the indifference curves to rank any two bundles of goods. For example, the indifference curves tell us that point D is preferred to point A because point D ill on a higher indifference curve than point A. (That conclusion may be obvious, however, because point D offers the consumer both more pizza and more Pepsi.) The indifference curves also tell us that point D is preferred to point C because point D is on a higher indifference curve. Even though point D has less Pepsi than point C, it has more than enough extra pizza to make the consumer prefer it. By seeing which point is on the higher indifference curve, we can use the set of indifference curves to rank any combinations of Pepsi and pizza.

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