AP_Krugman_Textbook

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 Blies on the same contour line, it yields Ingrid

788 section 14 Market Failure and the Role of Government

figure 80.1

Ingrid’s Utility Function

The three-dimensional hill shows how Ingrid’s

total utility depends on her consumption of hous-

ing and restaurant meals. Point Acorresponds to

consumption of 3 rooms and 30 restaurant

meals. That consumption bundle yields Ingrid

450 utils, corresponding to the height of the hill

at point A.The lines running around the hill are

contour lines, along which the height is constant.

So every point on a given contour line generates

the same level of utility.

10

30

20

50

40

70

60

90

80

9 10

7 8

5 6

3 4

1 2

0

A B

750 utils

1,050 utils

900 utils

600 utils

300 utils

150 utils

0 utils

Quantity

of rooms

All combinations of

rooms and restaurant

meals along this contour

line yield 450 utils.

Quantity of

restaurant meals

450 utils

figure 80.2

An Indifference Curve

An indifference curve is a contour line along

which total utility is constant. In this case, we

show all the consumption bundles that yield In-

grid 450 utils. Consumption bundle A,consisting

of 3 rooms and 30 restaurant meals, yields the

same total utility as bundle B,consisting of 6

rooms and 15 restaurant meals. That is, Ingrid is

indifferent between bundle Aand bundle B.

Indifference

curve, I

A

B

021357910468

90

80

70

60

50

40

30

15

Quantity of rooms

Quantity of

restaurant

meals

450 utils