Moving on to behavioral indifference curves…

Prof. John Komlos of Ludwig-Maximilians University has this interesting paper.

He says it is high time we move onto behavioral indifference curves (which have kinks) from the usual indiff curves (which are smooth downward sloping):

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.

He picks holes on the traditionally taught indiff curve and considers it as flawed.

He has written a book which looks like a great reading.

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