The all-new Theory Thursdays!

This week’s theory challenge takes a look at indifference curves. Indifference curves map out consumer preferences between different sets of goods, and allow us to determine what happens when the consumer faces a change in their income or in the price of the good. For those teachers who are short on time in terms of explaining the basics of indifference curve analysis to students, then this YouTube video provides an adequate introduction. Below are some sets of questions that students can tackle after getting their head around the basic concepts.

Question Set One

1. What is an indifference curve?
2. Why are they shaped the way they are?
3. Why are indifference curves that are further away from the origin preferred by consumers?
4. What is a budget line?
5. Explain what happens to the budget line when (a) the consumer’s income rises, and (b) the price of one good rises?
6. Explain how knowing a consumer’s indifference curves and the budget line can help us to work out what combination of goods the consumer will buy.

Question Set Two

1. How could we use indifference curve analysis to show whether a good is normal or inferior?
2. Using relevant diagrams, explain how we can use indifference curve analysis to determine the demand curve for a good.
3. Suppose the government wants to raise tax revenue; they can choose whether to increase income tax or increase the rate of indirect tax (VAT). How could we use indifference curve analysis to decide which approach leaves consumers in a better position?

Question Set Three

1. What might a set of indifference curves look like for two goods that are perfect substitutes? And perfect complements?
2. What might a set of indifference curves look like for two goods, where one good is disliked by the consumer?

A useful textbook to direct students towards if they want to do more reading on this is H. Varian’s Intermediate Microeconomics. Good luck!