indifference curves

CFA Level I
#1

hello

i’m wondering why the indifference curev in consumer’s demand is negative, and in portfolio management is positive?

#2

Do you mean the slopes of the indifference curves?

If so, note that in the consumer demand scenario, the vertical axis is the amount of one asset and the horizontal axis is the amount of another asset. More of an asset is considered better than less of that asset, so you get more utility moving up and more utility moving to the right. Thus, to keep the same utility, if you move to the right, you have to move down: negative slope.

In portfolio management the vertical axis is return (a good thing) and the horizontal axis is risk (a bad thing). You get more utility moving up and _ less _ utility moving to the right. Thus, to keep the same utility, if you move to the right, you have to move up: positive slope.

#3

First we need to understand that Indifference Curve is unique for each and every individual on this earth. What gives you happiness may not give me same degree of happiness. The happiness or satisfaction is being called ‘Utility’. The Utility for a user remains same if the user walks on a particular indifference curve.

Indifference curves can take almost any conceivable form.

For Example -

  1. It is L shape for a perfect complement e.g. right hand mitten vs. left hand mitten.

  2. It is negatively sloped for a perfect substitute e.g. table salt produced by company A vs. company B.

  3. It is vertical for a useless good e.g. millions of dollars in an island (with no shop to buy) vs. Banana.

  4. It is positively sloped for Economic Bad e.g. Food vs. houseflies.

With this background, you need to reanalyze your problem statement.

The intuition should help you in answering your problem.

Thanks

Phil

#4

Indifference curves plot the various combinations of two goods which will give the same utility. At the higher end of the curve when the consumer has less units of good X with him he is willing to give up less units of X for getting 1 unit of Y… However as the quantity of X with him increases its utility for him decreases and he is willing to give up more units of X for a unit of Y…that’s why it is downward sloping.