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An indifference curve is an iso-utility curve that represents all points that have the same utility. It means that a consumer should be indifferent at any point on the curve because all points represent the same level of utility.
Axioms of Indifference Curves:
- Monotonicity means more is always preferred to less. For example, five bananas will always be preferred to four bananas. Utility of (x+1) will always be higher than U(x).
- Continuity means that bundles can be broken down into infinitely small bundles. The idea is to have indifference curves that are continuous and not discrete points of certain (whole) bundles.
- Convexity means that consumers prefer average bundles to extreme bundles. Suppose a consumer is indifference between two bundles A and B such that U(A) = U(B). If we introduce a bundle C which is the average of A and B such that C = (A+B)/2 then U(C) > U(A) ~ U(B). This means that the consumer gets more utility from the average bundle than the extreme bundles.
Marginal rate of substitution
The marginal rate of substitution represents the rate at which a consumer gives up good y for a unit of good x in order to stay indifferent (have the same utility). The MRS for a convex function is not constant. In fact, it is diminishing. Different preferences have different types of MRS. Work with Central London Economics Tutors for A levels, IB Economics in and around London. We hire economics tutors from LSE, Kings, Warwick, UCL, Imperial, SOAS.
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