Unit 6 Indifference Curves and Utility Maximization

The Law of Diminishing Rate of Substitution

...States that as your consumption of "A" increases, the amount of "B" you are willing to give up to get another "A" declines.

Summary of the Properties of Indifference Curves:

1. A particular indifference curve reflects a constant level of utility, so the consumer is indifferent about all consumption combinations along a given curve. Combinations are equally attractive. 2. If total utility is to remain constant, an increase in the consumption of one good must be offset by a decrease in the consumption of the other good, so each indifference curve slopes downward. 3. Because of the law of diminishing marginal rate of substitution, indifference curves bow toward the origin. 4. Higher indifference curves represent higher levels of utility. 5. Indifference curves do not intersect.

Indifference Map

A graphical representation of a consumer's tastes. Each curve reflects a different level of utility.

Budget Line

Depicts all possible combinations of videos and pizzas, given their prices and your budget. -Combinations of goods -Able to buy -Consumption possibilities frontier

Indifference Curve

Shows all combinations of goods that provide the consumer with the same satisfaction, or the same utility (the consumer finds all combinations on a curve equally preferred).

Marginal Rate of Substitution

The number of "A" you are willing to give up to get more of "B", neither gaining nor losing utility in the process.