Indifference curves, Microeconomics

Indifference Curves: Every consumption-leisure point, (l; c), in the diagram is associated with a unique level of utility. The line II represents the individuals indifference curve. It gives the combinations of consumption, c, and leisure, l, that generate some particular level of utility, u. Indifference curves have three properties:

(1) Indifference curves slope downwards. Why? Again, along an indifference curve utility is fixed at u. Therefore, to give the person more leisure, l, you must take away some of his consumption, c, at least if you want to keep him at the specified level of utility, u. The slope of the indifference curve gives the .marginal rate of substitution between leisure and consumption. In other words, it speci.es the maximal amount of consumption that the person is willing to forgo in order to gain an extra unit of leisure. Anymore consumption would reduce the persons utility and any less would raise it.

(2) The slope of an indifference curve decreases (in absolute value) as you move from left to right along the horizontal axis. The more leisure a person enjoys the less consumption he is willing to give up for yet an extra unit. This reflects diminishing marginal utility in leisure and consumption. Each marginal unit of leisure generates less and less in extra utility. Likewise, each marginal unit of consumption that is taken away results in increasing losses in utility. Note that higher (lower) levels of utility are associated with indifference curves that lie outwards (inwards) from II.

(3) Indifference curves cannot cross one another. If they could then every point of intersection would be linked with two levels of utility.

Posted Date: 3/25/2013 6:31:57 AM | Location : United States







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