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

I 0
I 1
I 0
B
C
Indifference
curves
GOOD 2
A
I 1
Figure 5.12
GOOD 1
WHY INDIFFERENCE CURVES CANNOT CROSS
If two indifference curves crossed, a logical contradiction would occur. If curves crossed
at point A, then Fran would be indifferent between A and B, between A and C, and
therefore between B and C. But since B involves higher consumption of both goods than
C, B is clearly preferred to C.
Indifference Curves and Marginal
Rates of Substitution
The slope of the indifference curve measures the number of candy bars that the individual
is willing to give up to get another compact disc. The technical term for the
slope of an indifference curve is the marginal rate of substitution. The marginal rate
of substitution tells us how much of one good an individual is willing to give up in return
for one more unit of another. The concept is quite distinct from the amount a consumer
must give up, which is determined by the budget constraint and relative prices.
If Fran’s marginal rate of substitution of candy bars for CDs is 15 to 1, this means
that if she is given 1 more CD, she is willing to give up 15 candy bars. If she only had
to give up 12 candy bars, she would be happier. If she had to give up 20, she would say,
“That’s too much—having one more CD isn’t worth giving up twenty candy bars.” Of
course, Gary could have quite different attitudes toward CDs and candy bars. His marginal
rate of substitution might be 25 to 1. He would be willing to give up 25 candy
bars to get 1 more CD.
The marginal rate of substitution rises and falls according to how much of an
item an individual already has. For example, consider point F back in Figure 5.11,
where Fran has many CDs and few candy bars. In this case, Fran already has bought
all her favorite CDs; the marginal CD she buys now will be something she likes but
not something she is wild over. In other words, because she already has a large
126 ∂ CHAPTER 5 THE CONSUMPTION DECISION