indifference+curves+(including+assumptions+such+as+transitivity,+completeness++and+more+is+better)

“An indifference curve is represented for example on a graph whose horizontal and vertical axes are quantities of goods an individual might consume, an indifference curve represents a contour along which utility for that individual is constant” (About, 2006). This curve defines the combinations of two goods that give a consumer the same level of satisfaction. A consumer would be indifferent or not care about any combination of goods along the indifferent care because he or she gets the same level of satisfaction out of any combination along the indifference curve (Baye, 2006). An example of and indifference curve is seen below:
 * __Indifference Curve__**

Source: About. (2006). Definition of Indifference Curve. Retrieved February 11, 2006 from http://economics.about.com/cs/economicsglossary/g/indifference.htm.



Taken from Wikipedia

For example, if a consumer has a choice between bundles A, B, and C of Jolly Ranchers and Snickers candy bars which all lie on I3, the consumer would reply, “I don’t have a preference as to which assortment I get.” The consumer would reply this way because assortments A, B, and C all like on his or her indifference curve all giving him equal satisfaction. Consumers generally have different shapes of indifference curves because his or her unique preferences. “Marginal rate of substitution (MRS) is the absolute value of the slope of the indifference curve. MRS is the rate at which a consumer is willing to substitute one good for the other and still maintain the same level of satisfaction” (Baye, 120). For example, a consumer’s MRS is three. If he or she gains one additional unit of X, he or she has to give up three units of Y to keep the MRS of substitution between goods X and Y at 3. For completeness to occur, one has to assume that the consumer is capable of determining a preference or indifference for all bundles (Baye, 2006). For example, if a consumer must choose between bundles A and of Jolly Ranchers and Snickers candy bars, the consumer must prefer bundle A over B, B over A, or be indifferent about A and B. If a consumer is not able to distinguish completeness, it becomes hard to predict his or her consumption patterns.
 * Completeness**

Source: Baye, Michael R. (2006). Managerial Economics and Business Strategy. Boston; McGraw-Hill/Irwin.

If bundle A has equal amounts of Jolly Ranchers and Snickers as bundle B and A has more Snickers than bundle B, bundle A will be preferred by the consumer. In graphical terms, as points and indifference curves move up and to the right, consumers view the bundle or curve as being better or more attractive. As points move down and to the left, it begins to lose its attractiveness from the consumer(Baye, 2006). This is illustrated in the graph below.
 * More is better**



Source: //Wikipedia.// (2006). Indifference curve. Retrieved February 11, 2006 from http://en.wikipedia.org/wiki/Indifference_curve.

“For any three bundles, A, B, and C, if A>B and B>C, then A>C” (Baye, p. 121). Transitivity implies that indifference curves do no intersect one another and rules out the possibility that the consumer can not make a decision (Baye, 2006).
 * Transitivity**

If a consumer’s preference is not transitive then he or she would not be able to make a decision regarding what good to consumer. For example, Nick likes three goods: hot dogs, hamburgers, and ham sandwiches. In his mind, he prefers hot dogs over hamburger, hamburgers over sandwiches, and sandwiches over hotdogs. Because of his preferences are not transitive, he is unable to choose his best or favorite good.

The law of diminishing marginal utility says, “while keeping consumption of other products constant - there is a decline in the marginal utility that person derives from consuming each additional unit of that product” (Investopedia, 2007). Marginal utility can also be described as the level of satisfaction or enjoyment a one gets out of consuming a good.
 * Diminishing Marginal Utility**

A great example of diminishing marginal utility can be seen with all you can eat buffets. The first plate a consumer eats will give him or her the highest utility or satisfaction, but as the consumer goes back to the buffet a second and third time, his or her utility will continue to drop. Eventually the consumer will not receive any utility from the good because his or her hunger has been satisfied (Ivestopedia, 2007). Source: Investopedia. (2007). Law of Diminishing Marginal Utility. Retrieved February 11, 2006 from http://www.investopedia.com/terms/l/lawofdiminishingutility.asp.

In making these decisions on which goods to choose, consumers face constraints. These constraints can come from a number of different factors, including time, budget, and legal constraints. This idea of constraint is the next step when analyzing the indifference curves of consumers. Further information about budget constraints can be found at the following wikispace: http://mbaecon.wikispaces.com/budget++constraints
 * Other Wikispaces Conserning this Topic**

As you can tell from looking at the indifference curves, they never actually touch the axis'. This has to do with a theory known as the law of diminishing marginal utility. This means that as you consume one more unit, your marginal utility is not as high as the previous unit. This also plays a part in the shape of the indifference curves. More information about diminishing marginal utility can be found at the following wikispace: http://mbaecon.wikispaces.com/Diminishing+MU


 * Sample Test Questions**

1. True or False. As the indifference curve moves farther away from the origin, it becomes more attractive to the consumer.

2. In your own words, define what an indifference curve is.

3. In order for a consumer's preferences to be transitive, a. he or she must be able to make a decision. b. he or she is unable to make a decision. c. indifference curves must intersect each other. d. both a and c are correct.

4. Is this scenario complete? Billy loves American cars. He likes Fords, Chevys and Dodges. He prefers Dodges over Fords, but he also likes Fords over Chevys. Lastly, when choosing between Chevys and Dodges, he would like a Dodge.

5. Which example best represents the transitivity property? a. A = B b. A > B; B > C; C > A c. A > B, B > C; A = C d. A > B; B > C; A > C

(Answers found below)


 * Answers to Test Questions**

1. True, The reason for this has to do with the idea that more is better. As the indifference curve moves farther away from the origin, the amount of that specific good becomes higher, which is more attractive to the customer.

2. Indifference curves in more plain english are representations of combinations between two goods. There is a different good labled on each axis. The line represents the combination of the two goods that would give the consumer the highest amount of satisfactions.

3. A, As shown above in the transitive section, the second answer is incorrect because it rules out the idea that the consumer cannot make a decision. C is incorrect because by definition, the transitive property of the indifference curves means that they do not intersect. Since we know that C is incorrect, we can rule out choice D as a correct answer.

4. Yes, As we know from the definition of completeness, the consumer must represent either a preference or indiferrence. The consumer shows that they have a preference in each of the three situations, therefore it represents a complete pattern.

5. D, As we notice from the paragraph on thee transiticity property, it shows that for any three bundles, A, B, and C, if A > B and B > C, then A > C. Using this formula, we can compare it to the possible answers. The only possible correct answer is D. However, be aware of another form of this which is shown as A ~ B, B ~ C, then A ~ C, which represents that all three of the goods are equal. If we are looing at preference, this represents indifference.

Completed by: Steve Snider Ryan Marks Mark Duquaine