Dominick Salvatore Schaums Outline of Microeconomics, 4th edition Schaums Outline Series 2006

78 CONSUMER DEMAND THEORY [CHAP. 4
4.10 Why is water, which is essential to life, so cheap while diamonds, which are not essential to life, so expensive?
Since water is essential to life, the TU received from water exceeds the TU received from diamonds. However,
the price we are willing to pay for each unit of a commodity depends not on the TU but on the MU. That is, since we
consume so much water, the MU of the last unit of water consumed is very low. Therefore, we are willing to pay
only a very low price for this last unit of water consumed. Since all the units of water consumed are identical, we pay
the same low price on all the other units of water consumed.
On the other hand, since we purchase so few diamonds, the MU of the last diamond purchased is very high.
Therefore, we are willing to pay a high price for this last diamond and for all the other diamonds purchased.
Classical economists did not distinguish TU from MU and thus they were unable to resolve this so-called
“water-diamond paradox.”
INDIFFERENCE CURVES
4.11 Table 4.11 gives points on four different indifference curves for a consumer. (a) Sketch indifference
curves I, II, III, and IV on the same set of axes. (b) What do indifference curves show?
Table 4.11
I II III IV
Q x Q y Q x Q y Q x Q y Q x Q y
2 13 3 12 5 12 7 12
3 6 4 8 5.5 9 8 9
4 4.5 5 6.3 6 8.3 9 7
5 3.5 6 5 7 7 10 6.3
6 3 7 4.4 8 6 11 5.7
7 2.7 8 4 9 5.4 12 5.3
(a)
Fig. 4-13
(b)
In difference curves are a graphic picture of a consumer’s tastes and preferences (in utility analysis, the consumer’s
total utility curve introduced the tastes of the consumer). The consumer is indifferent among all the different
combinations of X and Y on the same indifference curve but prefers points on a higher indifference curve to points
on a lower one. Even though we have chosen to represent a consumer’s tastes by sketching only 3 or 4
indifference curves here, the field of indifference curves is dense (i.e., there are an infinite number of them).
All the indifference curves of a consumer give us the consumer’s indifference map. Different consumers have
different indifference maps. When the tastes of a consumer change, that person’s indifference map changes.