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Indifference Curve Analysis: An Alternative Approach to Understanding Consumer Choice
Read this section to learn about indifference analysis. Attempt the "Try It” problems at the end of the section before checking your answers.
8. Try It
Suppose a consumer has a budget for fast-food items of $20 per week and spends this money on two goods, hamburgers and pizzas. Suppose hamburgers cost $5 each and pizzas cost $10. Put the quantity of hamburgers purchased per week on the horizontal
axis and the quantity of pizzas purchased per week on the vertical axis. Draw the budget line. What is its slope?
Suppose the consumer in part (a) is indifferent among the combinations of hamburgers and pizzas shown. In the grid you used to draw the budget lines, draw an indifference curve passing through the combinations shown, and label the corresponding points
A, B, and C. Label this curve I.
The budget line is tangent to indifference curve I at B. Explain the meaning of this tangency.