Consider one indifference curve. Let the individual consume a small additional amount of x. The effect of this on total utility is given by the rate of change of utility with respect to a change in x, U/Qx , multiplied by the amount of the change in x, Qx. Next suppose that the individual reduces his or her consumption of y in such a way that the loss of utility caused by having less y exactly compensates for the gain in utility from having more x. The loss in utility from having less y is given by the rate of change of utility with respect to a change in y, U/Qy , multiplied by the amount of the change in y, Qy.
If we constrain the changes in x and y to be along one indifference curve, as illustrated in Panel a in Figure 3.9, then the overall change in utility must be zero. Therefore we have
Rearranging this we obtain
But the final term in this expression is the negative of the ratio of the marginal utility of x to the marginal utility of y. [See panel b in Figure 3.9]. So we conclude that
Slope of indifference curve =
The slope of the budget constraint
The equation of a budget constraint is
Rearrange this to give an equation for Qy in terms of Qx as follows:
Therefore, the slope of the budget line is given by – (Px/Py), as shown in panel (c).
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