Figure 8

 

Figure 8 shows a $600 weekly budget line when prices for shmoo and asparagus both equal $1 a pound and various indifference curves for one consumer. Indifference curve I2 reflects the highest level of satisfaction this consumer can attain, given her income level. Any other indifference curve on or below this budget line (for instance, I0 or I1) represents less satisfaction than I2. Indifference curves such as I3 would be preferable to I2 but are not feasible because they lie beyond the consumer’s budgetary constraint.

 

Indifference curve I2 is tangent to the budget line at point z. The amounts of asparagus and shmoo associated with point z (A0 and B0) represent this consumer’s best choices for consumption, given current prices and income. Notice that at point z the slopes of the budget line and indifference curve I2 are equal. This means that relative market prices (the slope of the budget line) equal relative marginal utilities (the slope of the indifference curve).

 

Thus the slope of indifference curve I2 at point z is (–MUa)/MUb and the slope of the budget line at point z is (–Pa/Pb). Because both are equal at point z,

 

or

Notice that indifference curve analysis yields the same condition for consumer equilibrium as the principle of equal marginal utilities per dollar, but we need not assume that consumers have utilometers that accurately measure utility for each product.