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Unformatted text preview: b. Slope of indifference curve is called Marginal Rate of substitution c. Indifference curves are convex to the origin i. Diminishing marginal rate of substitution ii. Critical property! (Looks like hyperbola) d. All pairs that have same utility are on the same utility curve i. Slope = -Marginal Utility of Beans/Marginal Utility of Carrots ii. Absolute value of slope of the indifference curve is called Marginal Rate of Substitution iii. Diminishing marginal rate of substitution 1. MRS tells us how much one good someone would willingly trade for an extra unit of another good and remain indifferent e. Utility is at a maximum when increasing X by a small amount and correspondingly decreasing Y leaves person just as well off as reverse operation i. When Marginal Rate of Substitution = Economic Rate of Substitution ii. MRS = MUx/MUy=Px/Py=ERS...
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- Fall '06