Indifference Curve Analysis: Beyond Simplifying Assumptions

Abstract

This article presents the proper analysis of indifference curve systems once some of the simplifying assumptions used to teach beginning students are relaxed. First, the diminishing MRS assumption is relaxed to allow the existence of concave4 indifference curves. Then the more-is-better assumption is relaxed.  This reveals a potential source of confusion for students: usually one can find the optimum of a system by choosing the point where the budget line touches the most northeastern indifference curve, but once the more-is-better assumption is relaxed, the preference order of the indifference curves becomes the main criterion – not geographical location. Once both assumptions are removed, we study the case where too much of a good thing can become a bad thing – that is, where the consumer can encounter satiation.