Quasilinear Utility
An indifference map is a set of indifference curves. Curves farther from the origin indicate higher levels of total utility. Thus, any combination of products A and B represented by a point on I4 has greater total utility than any combination of A and B represented by a point on I3, I2, and I1.
of indifference curves or an indifference map, as shown in Figure A7- . Each curve reflects a different level of total utility. Specifically, each curve to the right of our original curve (labelled I in Figure A7- ) reflects combinations of A and B that yield more utility than I. Each curve to the left of I reflects less total utility than I. As we move out from the origin, each successive indifference curve represents a higher level of utility. To demonstrate this fact, draw a line in a northeasterly direction from the origin; note that its points of intersection with successive curves entail larger amounts of both A and B and, therefore, higher levels of total utility.
Equilibrium at Tangency
Since the axes in Figures A7-1 and A7- are identical, we can superimpose a budget line on the consumer's indifference map, as shown in Figure A7-4. By definition, the budget line indicates all the combinations of A and B that the consumer can attain with his or her money income given the prices of A and B. Of these attainable combinations, the consumer will prefer that combination that yields the greatest satisfaction or utility. Specifically, the utility-maximizing combination will be the combination lying on the highest attainable indifference curve, which is called the consumer's equilibrium position.
In Figure A7-4 the consumer's equilibrium position is at point X, where the budget line is tangent to I. Why not point Y? Because Y is on a lower indifference curve, I2. By moving down the budget line—by shifting dollars from purchases of A to purchases of B—the consumer can attain an indifference curve farther from the origin and thereby increase the total utility derived from the same income. Why not point Z? For the same reason as for Y: point Z is on a lower indifference curve, I1. By moving up the budget line—by reallocating dollars from B to A—the consumer can get on the higher indifference curve I and increase total utility.
How about point W on indifference curve I4? While it is true that W would yield a greater total utility than X, point W is beyond (outside) the budget line and, hence, is not attainable by the consumer. Point X represents the optimal attainable combination of products A and B. Note that, according to the definition of tangency, the slope of the highest attainable indifference curve equals the slope of the budget line. Because the slope of the indifference curve reflects the MRS (marginal rate of substitution) and the slope of the budget line is Pb/Pa, the consumer's optimal or equilibrium position is the point where
Quantity of B
An indifference map is a set of indifference curves. Curves farther from the origin indicate higher levels of total utility. Thus, any combination of products A and B represented by a point on I4 has greater total utility than any combination of A and B represented by a point on I3, I2, and I1.
indifference map A series of indifference curves, each of which represents a different level of total utility and together show the preferences of the consumer.
equilibrium position The combination of products that yields the greatest satisfaction or utility.
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