other people might have different preferences. They might react to a lower rate of return by choosing the same

level of present consumption and savings at choice D, or by choosing less present consumption and more

savings at a point like F. For these other sets of preferences, the income effect of a lower rate of return on

present consumption would be relatively stronger, while the substitution effect would be relatively weaker.

Sketching Substitution and Income Effects

Indifference curves provide an analytical tool for looking at all the choices that provide a single level of utility.

They eliminate any need for placing numerical values on utility and help to illuminate the process of making

utility-maximizing decisions. They also provide the basis for a more detailed investigation of the

complementary motivations that arise in response to a change in a price, wage or rate of return—namely, the

substitution and income effects.
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