Budget Lines and Indifference Curves

We've taken the indifference curve data shown at the bottom of the article and created 5 indifference curves, as shown in our indifference curve graph. Each line represents the combination of hours we can assign to each worker in order to get the same amount of hockey skates assembled. The values of each line are as follows:

1. Blue - 90 Skates Assembled
2. Pink - 150 Skates Assembled
3. Yellow - 180 Skates Assembled
4. Light Green - 210 Skates Assembled
5. Purple - 240 Skates Assembled

Now we will add a budget curve to the analysis and show how these indifference curves can be used to make a decision.

Paying Your Employees

You find out from the chief financial officer that you have $40 to spend on salaries and with that you are to assemble as many hockey skates as possible. Each of your employees makes a wage of $10 an hour. You write the following information down:

Budget: $40
Chris's Wage: $10/hr
Sammy's Wage: $10/hr

If we spent all of our money on Chris, we could hire him for 4 hours. If we spent all of our money on Sammy, we could hire him for 4 hours instead. In order to construct our budget curve, we jot down two points on our graph. The first (4,0) is the point at which we hire Chris and give him the total budget. The second (0,4) is the point at which we hire Sammy and give him the total budget instead. We then connect those two points.

I've drawn my budget line in brown, as seen on the Indifference Curve vs. Budget Line Graph. You may want to keep that graph on a different screen or print it out, as we will be examining it closer.

First we have to understand what the budget line is telling us. Any point on our budget line (brown) represents a point at which we will spend our entire budget. The budget line crosses the point (2,2) indicating that we can hire Chris for 2 hours and Sammy for 2 hours, if we choose.

Any point below the budget line is known as feasible but inefficient because we can have those many hours worked but we would not spend our entire budget. The point (3,0) where we hire Chris for 3 hours and Sammy for 0 is feasible but inefficient because here we would only spend $30 on salaries and our budget is $40.

Any point above the budget line is known as infeasible because it would cause us to go over budget. The point (0,5) where we hire Sammy for 5 hours is infeasible as it would cost us $50 and we only have $40 to spend.

Our optimal decision will lie on our highest possible indifference curve. Thus we look at all the indifference curves and see which one gives us the most skates assembled.

If we look at our five curves, the blue(90), purple(150), yellow(180), and light green(210) all have portions which are on or below the budget curves. So they all have portions which are feasible. The purple curve(250) is at no time feasible since it is always strictly above the budget line. Thus we remove it from consideration.

Out of our four remaining curves, light green is the highest, and is the one that gives us the highest production value, so our answer must be on that curve. Note that many points on the light green curve are above the budget line. Thus not any point on the green line is feasible. If we look closely, we see that any points between (1,3) and (2,2) are feasible, the rest are not. Thus we can hire each for 2 hours or Chris for 1 hours and Sammy for 3 hours and know we are assembling the most possible number of skates.

In Budget Lines and Indifference Curves - Part 2, we will examine two more examples.

Indifference Curve Data

Hour	Sammy's	Chris's
Worked	Production	Production
1st	90	30
2nd	60	30
3rd	30	30
4th	15	30
5th	15	30
6th	10	30
7th	10	30
8th	10	30