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Appendix to Chapter 6
Indifference Curve Analysis
APPENDIX SUMMARY

Indifference curve and budget line analysis illustrates how a rational consumer attempts to find that
one combination of goods that most maximizes satisfaction given limited income. It can also illustrate
how a decline in a good’s price will result in an increase in the quantity demanded of the good. That is,
the law of demand can be derived from the rational decision-making process inherit in consumer
behavior.
An indifference cures shows the different combinations of goods that could be consumed without
changing the level of utility (or satisfaction). The slope of an indifference curve is negative and equal to
the marginal rate of substitution (MRS), which declines as one moves downward along the curve. The
result is a curve with a diminishing slope that is convex (bows inward) to the origin. An indifference map
is a set of indifference curves. An indifference curve that lies farther from the origin illustrates a higher
level of utility.
The budget line is negatively sloped and represents various combinations of goods that a consumer
can purchase at given prices with a given budget. The slope of any budget line equals the price of good
“x” divided by the price of good “y” (Px/Py). A budget line that lies farther from the origin indicates a
higher income level.
Consumer equilibrium occurs where the budget line is tangent to the highest attainable indifference
curve. At this unique point, MRS = slope of the budget line (the price ratio of Px/Py). Consumer
equilibrium illustrates that one combination of goods “x” and “y” the consumer should purchase in order
to maximize satisfaction given limited income.
If the price of good “x” falls, the budget line’s slope declines while the y-intercept remains the same.
This causes the budget line to pivot out (or swing out) away from the origin. The budget line becomes
tangent to a new indifference curve and a greater quantity of good “x’ is purchased. This illustrates the
law of demand which tells us that a lower price for a good will result in an increase in the quantity
demanded of the good.

NEW CONCEPTS INTRODUCED

indifference curve marginal rate of substitution (MRS)

indifference map budget line

INSTRUCTIONAL OBJECTIVES
After completing the appendix to this chapter, students should be able to:

1. Define an indifference curve and illustrate an indifference curve graphically.

2. Define the marginal rate of substitution (MRS) and explain why the MRS equals the slope of an
indifference curve.
3. Distinguish an indifference curve from an indifference map.
4. Define a budget line and illustrate a budget line graphically.
5. Explain why the budget line’s slope equals the price of good “x” divided by the price of good “y”
(Px/Py).
62 Economics for Today Appendix to Chapter 6: Indifference Curve Analysis 62

6. Describe why a budget line that lies farther from the origin indicates a higher income level.
7. Illustrate and explain what is meant by consumer equilibrium using an indifference map and a budget
line.
8. Summarize the law of demand using indifference curve and budget line analysis.

APPENDIX TO CHAPTER 6 OUTLINE

I. Preview

II. Constructing an Indifference Curve

a. Why Indifference Curves are Downward Sloping and Convex

Exhibit A-1 "A Consumer’s Indifference Curve"

b. The Indifference Map

Exhibit A-2 "A Consumer’s Indifference Map"

III. The Budget Line

Exhibit A-3 "A Consumer’s Budget Line"

IV. A Consumer Equilibrium Graph

Exhibit A-4 "Consumer Equilibrium"

V. Derivation of the Demand Curve

Exhibit A-5 "Deriving the Demand Curve"

VI. List of Key Concepts

VII. Summary

VIII. Summary of Conclusion Statements

a. The slope of the indifference curve is negative and equal to the marginal rate of substitution
(MRS), which declines as one moves downward along the curve. The result is a curve with a
diminishing slope that is convex (bowed inward) to the origin.
b. Each consumer has a set of indifference curves that form a map. Since consumers wish to
achieve the highest possible total utility, they always prefer curves further from the origin
where they can select more quantities of two goods.
c. The budget line represents various combinations of goods that a consumer can purchase at
given prices with a given budget.
d. The slope of the budget line equals the ratio of the price of good X on the horizontal axis
divided by the price of good Y on the vertical axis. Expressed as a formula: slope = Px/Py.
e. Consumer equilibrium occurs where the budget line is tangent to the highest attainable
indifference curve. At his unique point, MRS = slope of the budget line (Px/Py).

IX. Study Questions and Problems

X. Sample Quiz
63 Economics for Today Appendix to Chapter 6: Indifference Curve Analysis 63

HINTS FOR EFFECTIVE TEACHING

1. The negative slope of the indifference is intuitive to students when they are reminded that the level of
utility (or satisfaction) is constant along a given indifference curve. That is, as one gets more of good
“x” then they will have to give up some of good “y” if utility is to remain constant. However, it may
be helpful to focus on the ratio of the number of units of good “y” which have to be given up in order
to obtain an additional unit of good “x.” In so doing, we find that the slope of the indifference curve,
the MRS, is really equal to the ratio of the marginal utility of good “x” in relation to the marginal
utility of good y” (or MUx/MUy). That is, if 2 units of good “y” have to be given up in order to
obtain an additional unit of good “x” then the marginal utility of good “x” is twice that of good “y”
and MUx/MUy = 2/1 = 2. Furthermore, as one obtains still greater quantities of good “x” then fewer
and fewer units of good “y” will be given up. This is due to the diminishing marginal utility
(diminishing extra satisfaction) associated with the increased consumption of any good or service. In
other words, as we get more and more of any good or service then the extra satisfaction (marginal
utility) derived from its consumption diminishes. Hence, we can conclude that the slope of any
indifference curve equals the MRS = MUx/MUy. And because of diminishing marginal utility, the
slope declines and therefore the indifference curve bows in toward the origin.

2. Some Professors like to stress that because the slope of an indifference curve equals MUx/MUy and
the slope of the slope of budget line equals Px/Py then at the point of tangency, where the slopes are
equal, then MUx/MUy = Px/Py. Dividing both sides of that equation by Px and multiplying both sides
by MUy we end up with MUx/Px = MUy/Py. This expression is convenient because it shows that the
ratio of the marginal utility in relation to the price is the same for both goods. In other words, the
extra satisfaction for the money spent is the same for both goods. This defines consumer equilibrium
because if MUx/Px > MUy/Py, then the extra satisfaction for the money spent on good “x” is greater
than that for good “y” and the consumer will purchase more of good “x” and less of good “y.” The
opposite is also true. So, MUx/Px = MUy/Py defines consumer equilibrium.

CRITICAL THINKING/GROUP DISCUSSION QUESTIONS

1. Consider point “Z” in Exhibit A-4 in the textbook. Why doesn’t point “Z” indicate consumer
equilibrium?
Point “Z” is not a point of consumer equilibrium because at point “Z” the consumer can afford
a different combination of lobsters and steak that will give rise to more utility. Indeed, by
moving up along the budget line toward point “X” the consumer will run into indifference
curves that lie farther from the origin (indicating higher levels of satisfaction). This process
continues until the consumer reaches point “X” or consumer equilibrium.

2. At point “Z” in Exhibit A-4 in the textbook, is MUx/Px > MUy/Py or is MUx/Px < MUy/Py?
At point “Z” MUx/Px < MUy/Py. This means the extra satisfaction for the money spent
associated with good “x” (lobsters) is less than that for good “y” (steak). So, the consumer
will consume les of “x’ and more of good “y.” This process continues until point “X” is
reached in Exhibit A-4 where MUx/Px = MUy/Py.

3. Using indifference curve and budget line analysis determine the impact of an increase in the price of
good “y” on the budget line and the consequent impact on the amount of good “y’ purchased. Does
this coincide with the law of demand?
If the price of good “y” increases the slope of the budget line decreases (it becomes flatter)
while the x-intercept remains the same. A new point of tangency is reached with a lower
indifference curve and a smaller quantity of good “y” is purchased. This coincides with the law
of demand that tells us that less is purchased at higher prices.
64 Economics for Today Appendix to Chapter 6: Indifference Curve Analysis 64

CLASSROOM GAMES

Approximately 170 non-computerized economic games (experiments) for use in the classroom are
available for free at http://www.marietta.edu/~delemeeg/games/. The following games are recommended
to help teach some of the concepts in the appendix to this chapter:
There are no recommended games for the appendix to this chapter.

ANSWERS TO EVEN-NUMBERED "Study Questions and Problems"

2. a. The slope of the budget line = Po/Pm = 10/6 = 5/3. This corresponds to the budget line with the
vertical intercept of 10 and the horizontal intercept of 6.

b. If the consumer spends the entire $60,000 budget on other goods and no medical services, the
quantity of other goods intercept is 6 units. If the price of other goods decreases from $10 to $5
per unit, the horizontal-axis intercept increases from 6 units to 12 units.
65 Economics for Today Appendix to Chapter 6: Indifference Curve Analysis 65

c. The rotation outward of the budget line allows the consumer to change consumer equilibrium at
point X on I1 to point Y on the higher indifference curve I2. Therefore, the consumer increases
total utility.

APPENDIX TO CHAPTER 6 SUMMARY QUIZ

1. An indifference curve:
a. slopes downward
b. bows in toward the origin.
c. does not intersect any other indifference curve on an indifference map.
d. all of the above.

2. The marginal rate of substitution:

a. equals the slope of an indifference curve at any point on the curve.
b. is the rate at which a consumer is willing to substitute one food for another good without a
change in total utility.
c. declines as more of a good is consumed.
d. all of the above.

3. A budget line:
a. represents all combinations of two goods that provide the same satisfaction or total utility to a
consumer.
b. represents various combinations of goods that a consumer can purchase at given prices with a
given budget.
c. is positively sloped.
d. has a slope equal to the marginal rate of substitution.

4. Consumer equilibrium exists when:

a. the slope of an indifference curve exceeds the slope of the budget line by the greatest amount
possible.
b. the slope of the budget line exceeds the slope of an indifference curve by the greatest amount
possible.
c. the budget line and the highest attainable indifference curve have equal slopes.
d. the budget line intersects an indifference curve that is sloping upward.
66 Economics for Today

ANSWERS TO APPENDIX TO CHAPTER 6 SUMMARY QUIZ

1. d
2. d
3. b
4. d
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no related content on Scribd:
 works for, 422.

Violin sonata (evolution), 384;

(G. B. Vitali), 387;
(Biber), 391;
(Corelli), 397ff;
(Albinoni), 399;
(Vivaldi), 400;
(Veracini), 402;
(Tartini), 403;
(Leclair), 407;
(Rust), 416;
(Handel), 421;
(various types), 426f;
(Beethoven), 454ff;
(Schubert), 457;
(Schumann), 457f;
(Brahms), 459f;
(Franck), 461;
(Saint-Saëns, modern French), 462f;
(Grieg), 463;
(Strauss), 465f.
See also Violin solo, sonata for.

Violin technique, (development), 368ff, 373ff;

(18th cent.), 430f;
(Paganini), 438;
(Spohr), 441;
(Brahms-Joachim), 460.
See also Double-stopping; Bowing.

Violinists. See Virtuosi (violin).

Violoncello music, 590ff;

(Beethoven), 592ff;
(Schumann, Mendelssohn), 595f;
(Brahms), 596f;
 (Grieg), 597;
(modern), 597f.

Viotti, Giambattista, 402, 404f, 408, 410ff, 428, 430, 431, 433, 488.
Violin concertos, 411.

Virdung, S., 374.

Virginal, 4.

Virginal music, 18.

Virtuosi, (piano), 209, 284, 290;

(violin), 401f, 411, 417, 435ff, 444, 451f.

Virtuosity, 41, 43, 45, 298f.

Virtuoso effects (violin), 401, 448.

Virtuoso music, 165, 177, 276, 288ff, 297, 304, 310, 400, 436, 443,
466, 511.

Virtuoso style, 216, 405.

Vitali, Giovanni Battista, 387, 479.

Vitali, Tommaso Antonio, 383, 388.

Vivaldi, Antonio, 37, 95, 98, 399, 400, 413, 483f;

(influence on Bach), 69, 422.

Vocal music (as chamber music), 467;

(15th-16th cent.), 486ff.

Vocal polyphony, 9.

Vocal style, 12;

 (influence on instrumental), 9 (footnote);
(in violin music), 376;
(in instrumental music), 377, 378.

Vogler, Abbé, 191.

Volkmann, Robert (string quartet), 547.

Wachs, Paul, 342.

Wagenseil, G. C., 113, 117, 123f, 498.

Wagner, Richard, 132, 133, 251, 442, 459;

(transcription of Tannhäuser overture), 307.

Waldhorn. See Horn.

Walter, Jacob, 386, 422.

Wasielewski, G., 122 (footnote);

(cited), 406, 412, 413, 415, 446.
Variations on a Popular Romanza, (op. 28), 185.
Variations on a Theme in C major (op. 7), 185.
Variations (op. 40), 186.
Variations on a Bohemian Melody (op. 55), 186.
Piano sonata in C major (op. 42), 188.
Piano sonata in A-flat major, 188ff.
Piano sonata in D major, 189.
Invitation to the Dance, 190f.
Konzertstück in F minor, 191f.

Weber, Carl Maria von, 132, 183ff, 206, 208, 209, 267, 350, 367;
(Preciosa transcription), 296;
 (clarinet compositions), 602f.

Weiss, Amalie, 451.

Weiss, Franz, 510, footnote.

Weitzmann (cited), 137.

Well-Tempered Clavichord. See Bach.

‘We're a' noddin',’ 285.

Whole-tone scale, 355, 359f.

Wieck, Clara. See Clara Schumann.

Wieniawski, Henri, 447, 450.

Wihtol, Joseph, 334.

Wilhelmj, August, 443.

Wind instruments (in chamber music), 598ff;

(combinations of), 604.

Woldemar, 436.

Women violinists, 404.

Worms, 371.

Wranitzky, Anton, 419.

Wyzewa, 425.

Y
Ysäye, Eugène, 461.

Zacconi, Ludovico, 375.

Zanata, 391, 478.

Zinke. See Cornetto.

Zmeskall von Domanowecz, Nicolaus, 492, 518.

Zweelinck, 16, 21.

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