4.3
Indifference curve analysis
We have now assumed:
● rationality
● consumers prefer more to less
● additional units yield decreasing satisfaction
● consistency and transitivity of choice
● diminishing marginal rates of substitution.
These assumptions can now be used to introduce indifference curve analysis.
An indifference curve shows combinations of two goods that yield the same total utility. Such an indifference curve (IC2) is shown in Figure 4.3. The consumer is assumed indiffer- ent between any combination of goods X and Y contained on that indifference curve.
Imagine point B on IC2 in Figure 4.3. If we assume the consumer always prefers more of one good and no less of another, then any combination of goods above and to the right of B must yield greater utility. Such a combination might be represented by point C on indifference curve IC3. All combinations on IC3 therefore provide greater utility than those on IC2. Similarly, point B would be preferred to any point below and to the left of that point. Point A therefore provides less utility than B and all combinations on IC1 provide less utility than those on IC2.