Behavioral Indifference Curves

13 Pages Posted: 9 Jul 2014

See all articles by John Komlos

John Komlos

Ludwig Maximilian University of Munich (LMU) - Faculty of Economics; CESifo (Center for Economic Studies and Ifo Institute)

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Date Written: June 25, 2014

Abstract

According to the endowment effect there is some discomfort associated with giving up a good, that is to say, we are willing to give up something only if the price is greater than the price we are willing to pay for it. This implies that the indifference curves should designate a reference point at the current level of consumption. Such indifference maps are kinked at the current level of consumption. The kinks in the curves imply that the utility function is not differentiable everywhere and the budget constraint does not always have a unique tangent with an indifference curve. Thus, price changes may not bring about changes in consumption which may be the reason for the frequent stickiness of prices, wages and interest rates. We also discuss a multiple period example in which the indifference map shifts as the reference point shifts implying that the curves cross over time even though tastes do not change.

Keywords: behavioral economics, indifference curves, endowment effect, reference state, gain and loss equivalence, stickiness of prices and wages

JEL Classification: A20, B50, D03, D11

Suggested Citation

Komlos, John, Behavioral Indifference Curves (June 25, 2014). CESifo Working Paper Series No. 4856. Available at SSRN: https://ssrn.com/abstract=2463571

John Komlos (Contact Author)

Ludwig Maximilian University of Munich (LMU) - Faculty of Economics ( email )

Ludwigstrasse 28
Munich, D-80539
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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