Consumer Choice Notes

# Consumer Choice Notes - 1 211-1 Notes for Week of 1 says...

• Notes
• bsw258
• 9

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1 211-1 Notes for Week of 10-6-2014 1) says that the MU per dollar must be the same across goods. If instead MU X /P X > MU Y /P Y , if I shift \$1 away from the purchase of Y toward X, total utility drops by MU Y /P Y due to less Y purchased but rises by MU X /P X due to more X purchased. Example: 5 = 10/2 = MU X /P X > MU Y /P Y = 12/4 = 3. If I spend \$1 less on Y, ceteris paribus, If spend \$1 more on X, ceteris paribus, On net, as a result, 1) is the “slopes condition” and 2) is the budget constraint. Hey….wait a minute. Before we did the calculus, we said that we needed MRS = P X / P Y for the consumer to be maximizing utility. The calculus gave us MU X /P X = MU Y /P Y as the condition. Are these different conditions??? Nope. Proof that MU X /MU Y ≡ MRS : First, here’s a quick reminder of something you learned in, like, 6 th grade… Y f(X) dY dX X An indifference curve is defined to be all points (x,y) such that U(x,y) = U (some level of utility).

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2 Happily, this also makes sense intuitively. Example: Y X A Quick Wrap-Up:
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• Spring '14
• EricSchulz

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