Page 830 - Krugmans Economics for AP Text Book_Neat

figure 80.1

Ingrid’s Utility Function All combinations of 1,050 utils
rooms and restaurant
The three-dimensional hill shows how Ingrid’s
meals along this contour
total utility depends on her consumption of hous- 900 utils
line yield 450 utils.
ing and restaurant meals. Point A corresponds to
750 utils
consumption of 3 rooms and 30 restaurant
meals. That consumption bundle yields Ingrid
600 utils
450 utils, corresponding to the height of the hill
at point A. The lines running around the hill are B 450 utils
contour lines, along which the height is constant. A
So every point on a given contour line generates 90 300 utils
80
the same level of utility. 70 150 utils
Quantity of 60
restaurant meals 50 0 utils
40 10
30 8 9
20 5 6 7
10 2 3 4 Quantity
0 1 of rooms

offer a three-dimensional view of the terrain; instead, it conveys information about
altitude solely through the use of contour lines.
The same principle can be applied to the representation of a utility function. In Fig-
ure 80.2, Ingrid’s consumption of rooms is measured on the horizontal axis and her
consumption of restaurant meals on the vertical axis. The curve here corresponds to
the contour line in Figure 80.1, drawn at a total utility of 450 utils. This curve shows all
the consumption bundles that yield a total utility of 450 utils. One point on that con-
tour line is A, a consumption bundle consisting of 3 rooms and 30 restaurant meals.
Another point on that contour line is B, a consumption bundle consisting of 6 rooms
but only 15 restaurant meals. Because B lies on the same contour line, it yields Ingrid

figure 80.2

An Indifference Curve Quantity of
restaurant
An indifference curve is a contour line along
meals
which total utility is constant. In this case, we
show all the consumption bundles that yield In- 90
grid 450 utils. Consumption bundle A, consisting 80
of 3 rooms and 30 restaurant meals, yields the 450 utils
same total utility as bundle B, consisting of 6 70
rooms and 15 restaurant meals. That is, Ingrid is 60
indifferent between bundle A and bundle B.
50
40
A
30
B
15 Indifference
curve, I

0 1 2 3 4 5 6 7 8 9 10
Quantity of rooms

788 section 14 Market Failure and the Role of Gover nment