consumer theory 2

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

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
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 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
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
2 Best affordable point • the magnitude of the slope of the indifference curve equals the magnitude of the slope of the budget line. MRS = p1/p2
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 04/13/2008 for the course ECON 1 taught by Professor Tang during the Spring '08 term at UCSD.

Page1 / 5

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

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online