[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

Moving along the curve in one direction, Fran is willing to accept more CDs in
exchange for fewer candy bars; moving in the other direction, she is willing to accept
more candy bars in exchange for fewer CDs. Any point on the same indifference
curve, by definition, makes her just as happy as any other—whether it is point A or
C or an extreme point like D, where she has many candy bars and very few CDs, or
F, where she has relatively few candy bars but more CDs.
However, if Fran were to receive the same number of candy bars but more CDs
than at A—say 150 candy bars and 15 CDs (point E)—then she would be better off,
on the principle that “more is better.” The new indifference curve I 1 illustrates all
those combinations of candy bars and CDs that make her just as well-off as the
combination of 150 candy bars and 15 CDs.
Figure 5.11 shows two indifference curves for Fran. Because more is better, Fran
(or any individual) will prefer a choice on the indifference curve that is higher than
another curve. On the higher indifference curve, she can have more of both items.
By definition, we can draw an indifference curve for any point in the space of an
indifference curve diagram. Also by definition, indifference curves cannot cross, as
Figure 5.12 makes clear. Assume that the indifference curves I 0 and I 1 cross at point
A. That would mean that Fran is indifferent to a choice between A and all points on
I 0 , and between A and all points on I 1 . In particular, she would be indifferent when
choosing between A and B, between A and C, and accordingly between B and C. But
B is clearly preferred to C; therefore, indifference curves cannot cross.
300
D
Indifference
curves
A
CANDY BARS
150
CANDY BARS
150
C
A
E
B
130
B
F
I 1
I 0
0
10 20
COMPACT DISCS
0
10 12 15
CDs
Figure 5.10
BUDGET CONSTRAINT
The budget constraint defines the opportunity set. Fran can
choose any point on or below the budget constraint. If she has
strong preferences for CDs, she might choose B; if she has
strong preferences for candy bars, she might choose point A.
Figure 5.11
INDIFFERENCE CURVES
An indifference curve traces combinations of goods to which an
individual is indifferent. Each reflects Fran’s taste for CDs and for
candy bars. She is just as well-off (has an identical amount of utility)
at all points on the indifference curve I 0 : A, B, C, D, or F.
APPENDIX: INDIFFERENCE CURVES AND THE CONSUMPTION DECISION ∂ 125