Midterm
MANAGERIAL ECONOMICS MIDTERM EXAMINATION
1. Define and explain the use of indifference curves. Why are firms increasingly sensitive to the application of indifference curves in today’s economy? How does one construct and interpret indifference maps for purposes of corporate strategy?
Define and explain the use of indifference curves.
“An indifference curve illustrates the various combinations of two goods [or groupings of commodities] that would provide equal satisfaction.” i Therefore an indifference cure is a way to graphically show consumer indifference or non-preferences between groupings of goods. The indifference means that the consumption combinations results in the same amount of utility or pleasure or satisfaction. As a consumer travels along the indifference curve (consuming the different combinations of goods), the result from the different combinations of consumption is the same level of total utility or combined satisfaction. Therefore the consumer is just as happy with either choice of consumption combination or indifferent to choosing one group over the other. Indifference curves can then be utilized to visually show individual consumer preference or demand over a group of commodities. From this demand observation you can identify patterns of consumer preference. A consolidation of multiple indifference curves graphed together is an indifference map. These maps represent all the possible groupings of commodities that result in a different levels of satisfaction.
The indifference curve is represented in the positive X and positive Y quadrant of a graph. “The further the indifference curve is from the origin, the more total utility it yields.ii A consumer desires to maximize their utility or satisfaction and therefore desires to get to the furthest point from (0,0) that they can get, or to the farthest indifference curve they can get to. This is where budget constraints come in. The consumer has a limited amount of money to
1. Define and explain the use of indifference curves. Why are firms increasingly sensitive to the application of indifference curves in today’s economy? How does one construct and interpret indifference maps for purposes of corporate strategy?
Define and explain the use of indifference curves.
“An indifference curve illustrates the various combinations of two goods [or groupings of commodities] that would provide equal satisfaction.” i Therefore an indifference cure is a way to graphically show consumer indifference or non-preferences between groupings of goods. The indifference means that the consumption combinations results in the same amount of utility or pleasure or satisfaction. As a consumer travels along the indifference curve (consuming the different combinations of goods), the result from the different combinations of consumption is the same level of total utility or combined satisfaction. Therefore the consumer is just as happy with either choice of consumption combination or indifferent to choosing one group over the other. Indifference curves can then be utilized to visually show individual consumer preference or demand over a group of commodities. From this demand observation you can identify patterns of consumer preference. A consolidation of multiple indifference curves graphed together is an indifference map. These maps represent all the possible groupings of commodities that result in a different levels of satisfaction.
The indifference curve is represented in the positive X and positive Y quadrant of a graph. “The further the indifference curve is from the origin, the more total utility it yields.ii A consumer desires to maximize their utility or satisfaction and therefore desires to get to the furthest point from (0,0) that they can get, or to the farthest indifference curve they can get to. This is where budget constraints come in. The consumer has a limited amount of money to
Bibliography: 1. Bradley Schiller, The Micro Economy Today, (13th ed.). New York: McGraw-Hill Co., 2012. 2. Handout: “The Value Chain” (Michael Porter). 3. Michael Porter, Article: “The Five Forces That Shape Strategy” Harvard Business Review, Jan 2008, hbr.org, pages 78-93. 4. Harry Dent Interview, “The Great Crash Ahead” on the Alex Jones Channel, You Tube: http://www.youtube.com/watch?v=rerdzeC4IUs