𝑑𝑈 This derivative gives us the relationship between (total) utility and

= 𝑀𝑈𝑋
𝑑𝑋 consumption of X. The sign of this derivative tells us whether X is a
“good” good, a “neutral” good, or a “bad” good.

𝑑𝑈 Same interpretation as above, but for Y.

= 𝑀𝑈𝑌
𝑑𝑌
Use the signs of both MUX and MUY to determine the direction of an
IC. For example, if MUX < 0 and MUY > 0, then X is a “bad” good, Y is
a “good” good, and the corresponding ICs slope upward.

𝑑2 𝑈 𝑑𝑀𝑈𝑋 This derivative gives us the relationship the marginal utility of X and
= the consumption of X. The interpretation of the sign of this derivative
𝑑𝑋 2 𝑑𝑋
depends on the sign of MUX. For example, suppose MUX < 0 and
dMUX/dX > 0. From dMUX/dX > 0 we know that MUX increases as X
increases. But, since MUX itself is negative, “increasing” means getting
less and less negative. We can thus conclude that X is a bad that gets
less and less bad the more you consume.

Confused? Let’s re-write the conditions in this example as dU/dX < 0

and d2U/dX2 > 0. Since the first derivative of (total) utility with respect
to X is negative, (total) utility decreases as X increases. Since the sign
of the second derivative of (total) utility with respect to X does not
match the sign of the first derivative, (total) utility decreases with X at a
decreasing rate. In other words, each X is bad, but each additional X
isn’t as bad as the last.

𝑑 2 𝑈 𝑑𝑀𝑈𝑌 Same interpretation, but for Y.

=
𝑑𝑌 2 𝑑𝑌

𝑀𝑈𝑋 Important: Always take the absolute value of the ratio of marginal
𝑀𝑅𝑆 = | |
𝑀𝑈𝑌 utilities before applying the rules for dMRS/dX and dMRS/dY on the
Graphing Indifference Curves Help Sheet!

𝑑𝑀𝑅𝑆 Use the signs of BOTH derivatives to determine the curvature of an IC.
𝑑𝑋 The key in interpreting the signs is to first consider the direction in
which both X and Y move along an IC.

For example, suppose the IC slopes downward. Based on this, we know

𝑑𝑀𝑅𝑆 that as X increases, Y decreases. We now want to know what happens to
𝑑𝑌 the MRS as X increases and Y decreases. If dMRS/dX < 0, then as X
increases along an IC from left to right, the MRS falls. (X and the MRS
move in opposite directions, a negative relationship.) Moreover, as Y
decreases along an IC from left to right, the MRS falls. (Y and the MRS
move in the same direction, a positive relationship.) The IC therefore is
convex, or slopes downward at a decreasing rate.