Managerial Economics

Chapter 6

Ordinal Utility Approach: Indifference Curve Theory and Its Applications

After studying this chapter, you should be able to understand:

• An indifference curve depicts various combinations of two goods, which give the same level of satisfaction or utility to the consumer.
• A higher indifference curve depicts a larger amount of satisfaction than a lower one because it represents a greater quantity of good x or y or more of both x and y.
• An indifference curve is negatively sloped.
• An indifference curve is convex to the origin.
• Indifference curves cannot intersect.
• When goods x and y are perfect substitutes, the indifference curve is a downward sloping straight line and the MRS_xy is constant.
• When goods x and y are perfect complements, ...