Indifference curve

The indifference curve is a graph of utilities such that every point along a curve has the same amount of total utility. A person should be "indifferent" to where he is along the curve, because his total utility is constant.

Example

Let’s take an example. Suppose you are working on the homework for this course with three friends - Chris, Stephanie and Kevin. Someone says they are hungry and go to look for snacks. You see a half-eaten bag of potato chips and you pop a bag of popcorn. However, there is not enough food for everyone, so have to ration who receives what.

You count 24 potato chips and 40 kernels of corn. Uh oh. There are four of you. On average, that’s only 6 potato chips and 10 kernels of corn per person. You tell everyone that.

But Chris likes potato chips more than corn; Stephanie prefers the opposite. To decide how to allocate the food, you ask Chris and Stephanie to draw their indifference curves with potato chips on the y-axis and corn on the x-axis. In graphing Chris's utility for two goods, you can construct a series of “indifference curves” for him. On a separate graph, you can also construct indifference curves for Stephanie.

You learn from the curve that Chris is just as happy with 9 potato chips and 2 kernels of corn as receiving 6 potato chips and 10 kernels of corn. Chris’s utility is same in both cases. Meanwhile, Stephanie is just as happy receiving 18 kernels of corn and 1 chip. Fine, you give Chris 9 chips and 2 kernels and Stephanie 18 kernels and 1 chip.

Was this worth it? You bet: now you have two extra potato chips that you would not have had by splitting everything equally. Chris and Stephanie are just as happy, and you can share the additional chips with Kevin.