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    The Experimental Determination of Indifference Curves

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    Pradeep Sachdev
    The document discusses previous attempts to experimentally determine indifference curves and proposes a new method. It describes studies by Thurstone and Rousseas and Hart that sought to elicit preferences through experiments but had limitations. The author then outlines their method using commodity bundles, reference points, and reward structures to motivate truthful responses from subjects. Indifference curves were drawn consistently across subjects and validated through consistency checks. The experiment provided empirical evidence that indifference curves possess the theoretical properties of non-intersection, negative slope, and convexity. Areas for future improvement were also noted.

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    The Experimental Determination of Indifference Curves

    Uploaded by

    Pradeep Sachdev
    85 views3 pages
    The document discusses previous attempts to experimentally determine indifference curves and proposes a new method. It describes studies by Thurstone and Rousseas and Hart that sought to elicit preferences through experiments but had limitations. The author then outlines their method using commodity bundles, reference points, and reward structures to motivate truthful responses from subjects. Indifference curves were drawn consistently across subjects and validated through consistency checks. The experiment provided empirical evidence that indifference curves possess the theoretical properties of non-intersection, negative slope, and convexity. Areas for future improvement were also noted.

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    The Experimental Determination of Indifference Curves

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    The document discusses previous attempts to experimentally determine indifference curves and proposes a new method. It describes studies by Thurstone and Rousseas and Hart that sought to elicit preferences through experiments but had limitations. The author then outlines their method using commodity bundles, reference points, and reward structures to motivate truthful responses from subjects. Indifference curves were drawn consistently across subjects and validated through consistency checks. The experiment provided empirical evidence that indifference curves possess the theoretical properties of non-intersection, negative slope, and convexity. Areas for future improvement were also noted.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    85 views3 pages

    The Experimental Determination of Indifference Curves

    Uploaded by

    Pradeep Sachdev
    The document discusses previous attempts to experimentally determine indifference curves and proposes a new method. It describes studies by Thurstone and Rousseas and Hart that sought to elicit preferences through experiments but had limitations. The author then outlines their method using commodity bundles, reference points, and reward structures to motivate truthful responses from subjects. Indifference curves were drawn consistently across subjects and validated through consistency checks. The experiment provided empirical evidence that indifference curves possess the theoretical properties of non-intersection, negative slope, and convexity. Areas for future improvement were also noted.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 3

    The Experimental Determination of Indifference

    curves
    Introduction

    The Author discusses about the empirical derivation of Indifference curves and provides insights into
    the work done so far and also proposes a method to carry out a procedure to experimentally
    determine indifference curves. The author emphasise that empirical determination of indifference
    curve is useful for determining preferences in non-market conditions apart from determining consumer
    demand.
    The author discusses about the merits of determination of indifference curve based upon actual
    expenditure and experimental data. Though indifference curves obtained from actual data would be
    more convincing, however the constraints such as number of economic units observed ,time period of
    observation, varying situations affect the outcome.
    Through this paper , the author based on the learnings of two previous studies by Thurstone and
    another by Rousseas and Hart, proposes a new procedure to experimentally determine the
    indifference curves.

    Process to experimentally determine Indifference curve

    Previous Studies - The two previous studies by Thurstone and another by Rousseas and Hart
    conducted and were reviewed by the author .The key points noted by the author about these
    experiments are as follows-

    1. Thurstone’s Experiment
    a. Thurstone was the first to experimentally determine indifference curves.
    b. Provided a useful feature about comparing commodities bundles with reference
    bundles.
    c. Shortcomings as observed by Author -
    i. Commodities selected for experimentation were not typically required in large
    nos and hence the subjects choice was purely hypothetical.
    ii. No of comparisons required by the subject to make the choices were very
    large.
    iii. Assumption about the shape of indifference curve.
    iv. There was only one subject.

    2. Rousseas and Hart Experiment


    a. No of subjects utilised was fairly large – 67
    b. Experiment was conducted twice within a month difference thus generating
    preference data at two distinct time periods.
    c. Provided a useful feature of forced consumption of the commodities that contributed
    to a more careful consideration by the subjects thus ensuring a closer to real life
    situation.
    d. Shortcomings as observed by the Author –
    i. Assumed homogeneity of tastes for the commodities selected i.e eggs and
    bacon.
    ii. Procedure adopted to fit curves was found to be cumbersome.

    Criticism about the usefulness of Indifference curve analysis on empirical data by Wallis and
    Friedman

    Basis the Thurstone’s experiment, Wallis and Friedman concluded that “it is probably not possible to
    design a satisfactory experiment for deriving indifference curves from economic stimuli applied to
    human beings” . This conclusion was based upon the following –
    a. Hypothetical choices do not elicit actual preferences
    b. A long period of time and many different situations must be observed to obtain preferences;
    and
    c. Effective experimentation would require control of virtually the entire existence of the subject.
    The author recognised the challenges as specified by Wallis and Friedman and also the useful
    features of Thurstones as well as Rousseas and Hart experiment’s to determine a procedure of its
    own .

    Objective of the experiment


    To determine whether the properties of the experimentally determined indifference curves meet the
    properties of theoretically determined indifference curves or not -
    1. Non intersection
    2. General negative slope
    3. Convexity to the origin

    Method of Experiment

    Reference point is chosen -P0 (determine the indifference curve passing through P0)
    Regions :
    (1) An accept region (A) - of all the points to which P0 is not preferred
    (2) A reject region (R) -", of all the points to which P0 is preferred

    The experiment determines the indifference curve by the boundary separating the two regions viz
    Accept and Reject.

    Two major difficulties:

    1. What motivation is there for a person to reveal his true preferences?


    a. Pay off procedures – Subject is motivated to reveal his true preference by making his
    final outcome contigent on the indifference curve he has drawn.
    2. How can a person be expected to consider every, or even many, points in the commodity
    space?
    a. Complexity reduction procedures – Can be used where saturation occurrence point of
    commodities is known.

    Summary of Experiment

    1. Seven subjects were given training to draw indifference curve. The subjects easily
    understood the procedure given their educational background i.e majors in economics,
    mathematics or engineering.
    2. First experiment was conducted with Pen and Money bundle on day one and second
    experiment was conducted on the following day with Pastries and Money bundle. The
    subjects drew the curves basis the choices made for commodity bundles offered to them.
    3. The Indifference curves drawn on the separate graphs by the subjects were very consistent
    when superimposed.
    4. Of the 21 consistency checks given to each subject, and chosen to be difficult (i.e., very close
    to an indifference line), an average of less than one choice per subject was actually in-
    consistent with the appropriate indifference curve.
    5. None of the subjects seemed to display any post-payoff dissonance when the actual payoffs
    were made.
    6. None of the usual properties of indifference curves was forced upon the subjects.
    7. The authors suggested the following to improve future experiments –
    a. A larger sample size.
    b. More no of subjects with variety of commodities in different periods of time.
    c. Validation of the curves drawn – Sensitivity of indifference curve with respect to a
    reference point ,through a barter situation amongst individuals and prediction of
    choices were suggested for validation of the experiment.

    Learnings/Feedback

    1. Through the paper we could understand that the empirical determination of indifference curve
    is useful for determining preferences in non-market conditions apart from determining
    consumer demand.
    2. The paper also proposes an easier empirical method to draw indifference curve which
    hitherto would have been difficult to obtain from the actual expenditure data.
    3. Indifference curve gets affected by change in the budget/income levels, which was not
    considered in the experiment.
    4. The experiment considered commodity bundles of pens and pastries upto 180 and 15
    respectively. The no of commodities in a bundle can be rationalised to reflect the actual
    requirements, say +/- 50% of per capita consumption to guage the actual consumption
    preferences.

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