Question

Consider a consumer that has preferences defined over bundles of non-negative amounts of each of two commodities. The consumer’s consumption set is R2+. Suppose that the consumer’s preferences can be represented by a utility func- tion, U(x1,x2). We could imagine a three dimensional graph in which the “base” axes are the quantity of commodity one available to the consumer (q1) and the quantity of commodity two available to the consumer (q2) respec- tively. The third axis will be the “height” axis. This will represent the value taken by the utility function at each combination of q1 and q2. An indiffer- ence curve map for this consumer is essentially the view that you would get of this graph if you were looking down on it from directly above, so that your line of sight is parallel with the “utility” axis. It will be a two-dimensional diagram that looks like a topographical map that people might use when they are hiking. The indifference curves play the role of contour lines. They indicate the locus of commodity bundles that yield the same utility level. Explain why it might be a good idea to indicate the direction (or directions) in which utility is increasing on the consumer’s indifference curve map.

Answer 1