2 Indifference

Econ 311
Indifference Curves
Bundles
• Some terminology: when you have a utility
function of two goods, any given combination
of those two goods is called a BUNDLE
• Every bundle has an associated utility level:

Bundles
function of two goods, and given combination

Bundles
function of two goods, and given combination

Indifference
• Indifference is basically what it sounds like:
– Any two bundles that give me the same level of
utility makes me indifferent between bundles
– Example:
Indifference
• Indifference is basically what it sounds like:
– Any two bundles that give me the same level of
utility makes me indifferent between bundles
– Example:
So you are indifferent between the bundles (3,2) and (0,4).

Indifference Set
• Given a utility function, and a level of utility,
you can find the whole set of bundles that you
are indifferent between.
• Example:
Indifference
• You can come up with a function that helps
you find ALL of the possible bundles that you
are indifferent between.
• This function is called an indifference curve.

Indifference Curves
• Indifference Curve Examples:
Indifference Curves
Indifference Curves
Indifference Curves
Indifference Curves
Indifference Curves
Indifference Curves
• Why do we care about indifference curves?
– We graph them.
– Graphing them is a key step to figuring out how to
solve an individual’s choice problem.
Indifference Curve Graphs
• Let’s do some practice graphs:
– U(x,y) = 3x + y
• Graph the indifference curves associated with U = 6, 9,
15
– U(x,y) = min(x, y/2)

• Graph the indifference curves associated with U = 2,8,9
– U(x,y) =
• Graph the indifference curves associated with U = 4
– U(x,y) =
• Add the indifference curves associated with U = 8, 12
– Don’t worry about getting the numbers right, where will the
curves be on the graph?
• Sidenote on Quasi-linear indifference curves:
– They look just like Cobb-Douglas indifference
curves
• What to take away graphically:
– There are 3 basic shapes to get comfortable with.
Indifference Curve Rules
• So I can graph some indifference curves. Now
what?
– We want to put restrictions on the kinds of

indifference curves that people have
– First, it’s really really important that you intuitively
understand what these indifference curves are
• An intuitive example.
– Think about weather reports:
• On cold days, what it feels like outside is a function of
two things
– Temperature
– Windchill
• An indifference curve represents all of the different
combinations of temperature and windchill that cause
you to feel the exact same thing.
• If the windchill suddenly gets worse, what must happen
to the temperature to keep you feeling the same
outside?
outside?
– It’s got to get warmer.
outside?
– So if I want to stay at the same level of happiness
and I lose some x, what must happen to y?
outside?
– So if I want to stay at the same level of happiness
and I lose some x. What must happen to y?
• I need more of it.
• This is why indifference curves have a negative slope
• Negative slope
• So indifference curves always go from the top
left of the graph to the bottom right.
– This is our first rule of ICs: monotonicity
• This defines 2 geometric sets: one up and to

the right of the IC and one down and to the
left.
– Up and right means you have more stuff: better
– Down and left means you have less stuff: worse
• This brings us to the second restriction we put
on indifference curves.
• Different indifference curves taken from the

same utility function can never cross.
– Why?
This graph says that:

Bundle B is worse than Bundle A
Bundle A is worse than Bundle B
Bundle D is better than Bundle C

Bundle C is better than Bundle D
• So crossing ICs lead to logical contradictions.
• The third and final rule about ICs is that they

are convex.
– What does this mean?
– In words: balanced combinations of two goods are
preferred to extreme outcomes (a lot of one good,
little of the other)
• So crossing ICs lead to logical contradictions.
• The third and final rule about ICs is that they

are convex.
– What does this mean?
– In math: connect any 2 bundles on an IC with a
straight line. Every point along that line will be
preferred (in the better than set).
• Graphically:
Indifference Curves
• To summarize: 3 properties of standard ICs
– Monotonic
– Non-crossing
– Convex
• We’ve just seen, graphically that Cobb-

Douglas type utility functions fulfill all 3
properties
Indifference Curves
• The other main types, PS and PC, fulfill all 3
properties too, but not strongly.
– What does that mean?

• Let’s start with PS indifference curves.
• Graphically:

• Let’s start with PS indifference curves.
– They will never cross
– They will be monotonic
– They will only be “weakly” convex

• Now for PC indifference curves.
• Graphically:

• Now for PC indifference curves.
– They will never cross
– They will be convex
– They will only be “weakly” monotonic
• So the preferences we focus on all have
standard ICs, at least weakly.
• A test of your intuition:

– Draw some indifference curves that violate these
assumptions.
• What will the ICs look like if X is a good and Y is a bad?
– Pizza and Homework
• A test of your intuition:
– Draw some indifference curves that violate these
assumptions.
• What will the ICs look like if you prefer consuming X
and Y separately?
– Vodka and Cottage Cheese
• Last and most important fact about
indifference curves.
• Remember the intuition about what’s

happening when you move along an
indifference curve (let’s say you’re moving
down and to the right)
• Remember the intuition about what’s
happening when you move along an
indifference curve (let’s say you’re moving
down and to the right)
– You are trading Y for X, holding constant your level

of happiness.
• If the slope is steep:
– Giving up one unit of y doesn’t necessitate adding
a lot of x
• If the slope is shallow:

– Giving up one unit of y does necessitate adding a
lot of x
• So the slope of the indifference curve
measures your willingness to tradeoff
between x and y.
• What does this remind you of?

• So the slope of the indifference curve
measures your willingness to tradeoff
between x and y.
• What does this remind you of?

– THE SLOPE OF THE INDIFFERENCE CURVE IS THE
MARGINAL RATE OF SUBSTITUTION (times -1)
• Remember back to our math with units:
– It showed that the MRS measures the units of y
per unit of x.
• Remember back to our math with units:
– It showed that the MRS measures the units of y
per unit of x.
• The IC is a function in the x-y plane.

– Its slope measures the units of y per unit of x
• Why is the IC slope the negative MRS?
– The MRS is the ratio of the effect of increasing x
on your utility to the effect of increasing y on your
utility.
• Why is the IC slope the negative MRS?
– The MRS is the ratio of the effect of increasing x
on your utility to the effect of increasing y on your
utility.
– The IC slope is about keeping utility constant
• Instead of both x and y going up, one of them is going
up and the other is going down.
– Therefore IC Slope = -MRS

• Mathematical proof (PS):
• Mathematical proof (Cobb-Douglas):
• Summary
– You know all about utility functions and how to
use them to calculate an MRS
– You know all about indifference curves and how
the IC slope relates to the MRS
– What’s next?
• Summary
– As you’ve probably guessed, the MRS is going to
be the key to solving utility maximization
problems.
• Both mathematically (using a calculated MRS from a

utility function)
• And graphically (using the drawn MRS as represented
by the slop of the indifference curve)
• The last thing we have to do before solving
those problems is learn about the constraint.
– Utility and indifference curves is all about benefit

and converting that into some 2-dimensional
notion of marginal benefit
– The budget will be all about cost and converting it

into some 2-dimensional notion of marginal cost

2 Indifference

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2 Indifference

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Econ 311

• Every bundle has an associated utility level:

• Every bundle has an associated utility level:

• Every bundle has an associated utility level:

So you are indifferent between the bundles (3,2) and (0,4).

• This function is called an indifference curve.

– U(x,y) = min(x, y/2)

– We want to put restrictions on the kinds of

• This defines 2 geometric sets: one up and to

• Different indifference curves taken from the

This graph says that:

Bundle D is better than Bundle C

• The third and final rule about ICs is that they

• The third and final rule about ICs is that they

• We’ve just seen, graphically that Cobb-

– What does that mean?

– What does that mean?

– What does that mean?

– What does that mean?

• A test of your intuition:

• Remember the intuition about what’s

– You are trading Y for X, holding constant your level

• If the slope is shallow:

• What does this remind you of?

• What does this remind you of?

• The IC is a function in the x-y plane.

– Therefore IC Slope = -MRS

• Both mathematically (using a calculated MRS from a

– Utility and indifference curves is all about benefit

– The budget will be all about cost and converting it

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