INDIFFERENCE MAP

Introduction Indifference map is: a diagram consists of a set of indifference curves which shows the ranking of preference We use arrows to show preference direction Qy U3 the innermost IC has the highest utility while the outermost has the lowest utility U2 U1 Qx U3>U2>U1

Introduction-(cont’d) Indifference curves can be used to illustrate a number of economic concepts like perfect substitutes, perfect complements and bads.

Case 1-a good-good situation Good is something people prefer some to none. banana We assume good x to be apple and y to be banana. Ò the IC farther to the right shows the higher levels of utility as we prefer more of both goods. Ò In this case, the indifference curves are downward sloping and the arrows show preference direction.   U3 U2 U1 apple U3>U2>U1

Case 2 -a bad-good situation U3>U2>U1 Opposite to good, bad is something people prefer less to more. We assume x to be noise pollution (bad) and y to be silence (good). silence U3 U2 U1 The arrow points left means a smaller amount of noise will lead to higher utility. The arrow points up means a greater amount of silence will lead to higher utility ICs are upward sloping Noise pollution

Case 3 -a good-bad situation Noise pollution A case similar to case 2 we assume x is silence (good) and y is noise pollution (bad) this time Arrow pointing down means a smaller amount of noise brings higher utility Arrow pointing right means a greater amount of silence brings higher utility U3>U2>U1 U1 U2 U3 ICs are upward sloping silence

Case4 -a bad-bad situation we assume x is rubbish and y is noise pollution As they are both bad, this means that we would prefer less of these things U3>U2>U1 Noise pollution Arrow pointing down means a smaller amount of noise brings higher utility Arrow pointing left means a smaller amount of rubbish brings higher utility U1 U2 U3 ICs are downward sloping and concave to origin rubbish

Case5 -x is good, y is neuter Neuter is something which a person is indifferent to having, and does not care to have any or none, more or less. U3>U2>U1 dress in this case, we assume that x is good and y is neuter. To a man ,trousers are good and dresses are neuter. For a fixed quantity of trousers,a greater amount of dresses will not affect utility. IC on the right represent a greater quantity of trousers ,so utility is higher . IC are parallel vertical lines and the arrow shows the preference direction U1 U2 U3 trousers

Case6 -x is neuter, y is good Similar to case 5 in this case, x is neuter and y is good. The assumption is that for a man, trousers are a good and dresses are a neuter. trousers U3 U2 U1 U3>U2>U1 dresses

Case7 -x is bad, y is neuter In this case, we assume that x is bad and y is neuter. U3>U2>U1 meat Õ To a vegetarian, meat is a neuter as he is indifferent to have any, but the bone of the meat is rubbish and is regarded as bad. Õ The greater quantity of neuter will not affect the level of utility Arrow pointing to the left means a smaller quantity of bad leads to a higher utility U1 U2 U3 Bones(bad)

Case8 -x is neuter, y is bad Similar to case 7 In this case, we assume that x is neuter and y is bad. There is still a vegetarian who does not care about having any meat but would not prefer to have any bones as they are waste. Arrow pointing down means a smaller quantity of bad leads to higher utility Bones(bad) U3 U2 U1 U3>U2>U1 meat

Case9 -perfect substitutes Perfect substitutes are two goods that can be substitutable at a fixed ratio.(eg. 1:1)   England’s beef 6 M Therefore, MRS is constant, i.e. 1. 5 M If 4 units of England’s beef is exchanged for 4 units of Japan’s beef, utility is constant. 4 M Based on the same MRS, 5 units of England’s beef will be exchanged for 5 units of Japan’s beef, and utility is constant. U3 U2 Japan’s beef U1 4 5 6

Case10 -perfect complements Perfect complements are two goods that have to be used together in a fixed proportions. Here, we will use the left sock and right sock to be our examples. Compare points A,B,and C To have 2 left socks and 1 right sock or to have 2 right socks and 1 left sock will not provide a higher utility than 1 left sock and 1 right sock Similarly , to have 2 left socks and 3 right socks or 3 left socks and 2 right sock will not provide a higher utility than 2 left socks and 2 right socks. Left sock 2 U2 B 1 A U1 ICs are L-shaped and the turning point of IC shows the ratio of the two complement goods to be used together C 1 2 Right sock

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