This reading assignment is short: pp. 551-555.

Since utility is difficult to measure (how many "utils" do you receive when you consume a pizza?), economists have developed a more sophisticated tool, namely income constraints and indifference curves. Suppose you order two large pizzas and two beers at a local pizzeria this evening. Suppose also that you would be equally satisfied (i.e., receive just as much satisfaction or utility) if you ordered and consumed one large pizza and three beers or three pizzas and one beer. Let's say that either of these equivalent choices would provide you with more utility than choosing four beers and no pizza or four pizzas and no beer or two pizzas and one beer. Within the limits of your budget or income constraint, you would like to choose either of the first three options and avoid the last three choices. You could set up a graph and put the quantity of pizza on one axis and the quantity of beer on the other. You will notice that the first three combinations of pizza and beer are further out to the right than the last three. Just plot the first three choices and connect them together and do the same with the last three.

Subject to your budgetary limit, you want to be on the indifference curve that is the furthest to the right. Study page 552 in Colander to learn how to graph a budget line or income constraint. As is true for indifference curves, you want your budget line to be as far to the right as possible. When a budget line shifts to the right, either your income has increased or prices have decreased. If the income constraint shifts to the left, either prices have increased or income has decreased.

All combinations of goods that are on an indifference curve located to the right of another indifference curve provide more utility than any combination located on an indifference curve to the left. It is also true that all of the plotted points (i.e., possible combinations of the two goods) that are on any particular indifference curve offer the same amount of total utility. In other words, the consumer is indifferent to any of the combinations that are on a specific indifference curve. The consumer's objective is to find where his or her budget line touches the indifference curve that is the furthest to the right on a graph.

Study the six graphs presented in this section (the sixth one has two parts).

Know the key terms presented on p. 555.

You have now completed all the readings needed for the first exam. Congrats!