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econ ch 11 outline

econ ch 11 outline - Kristin Chen Econ CH 11-Consumer...

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Kristin Chen Econ CH 11—Consumer Preferences & Consumer Choice 1. Utility Function a. Indifference curve = a line that shows all the consumption bundles that yield the same amount of total utility for an individual b. Indifference curve map = a collection of indifference curves in which each curve corresponds to a different level of total utility 2. Properties of indifference curves a. 1 ) Indifference curves never cross i. Each consumption bundle must correspond to a unique total utility level b. 2) The farther out an indifference curve lies the higher level of total utility it indicates c. 3) Indifference curves are downward sloping d. 4) Indifference curves have a convex shape i. Due to diminishing marginal utility e. Ordinary goods satisfy all 4 properties of indifference curves 3. Indifference Curves & Consumer Choice a. Marginal rate of substitution [MRS] of good R in place of good M is equal to MU R /MU M = ratio of the marginal utility of R to the marginal utility of M b. Along the indifference curve:
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