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consumer theory 2

# consumer theory 2 - Budget Line(graphically q2 I/p2 slope...

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1 Budget Line (graphically) p 1 q 1 + p 2 q 2 = I p 2 q 2 = - p 1 q 1 + I q 2 = - (p 1 /p 2 )q 1 + I/p 2 I/p 2 I/p 1 q 2 q 1 slope = - (p 1 /p 2 ) Slope of Budget Constraint Slope = p1/p2 (relative price) The slope of the line is the opportunity cost of good 1 (x-axis good) in terms of good 2 (y-axis good) how much good 2 you would have to give up to get one more of good 1 – two bo staffs for 1 nunchuk q 2 = - (p 1 /p 2 )q 1 + I/p 2 Income=\$10, Pn=2, Pb=1 y intercept=I/Pb=10/1 x intercept=I/Pn=10/2 slope=Pn/Pb=2/1 Nunchuks uaks Bo Staff 5 10 Unaffordable Slope=-2 Affordable (1,8) (2.5,5) Slope of Indifference Curve Marginal Rate of Substitution (MRS) MRS is the amount of the good on the y-axis the consumer is willing to give up to compensate for the gain of 1 unit of the good on the x-axis. The MRS at any point along an indifference curve is the absolute value of the slope of the indifference curve at that point. Standard indifference curves: slopes = marginal rate of substitution q 2 q 1 Slope = MRS = q 2 / q 1 q 2 q 1 Putting it all together: constrained optimization I/p 2 I/p 1 q 2 q 1

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