Econ101October24 - b Slope of indifference curve is called...

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Econ 101 October 24, 2007 Prelim: Chapters 8-9, Excel Problem Set 2, Welfare Experiment Indifferences Analysis I. Budget Line Analysis a. Real income increases when budget lines moves out (right) b. Real income decreases when budget line moves in (left) II. Utility and Preferences a. Utility: How economists measure preferences b. Among two choices, the one with higher utility is preferred choice c. If utility is equal, the consumer has no preference d. Symbols: i. R = “at least as good as ii. B = Bundle iii. IN = indifferent to 1. B1 R B2 and B2 R B1 implies B1 IN B2 iv. P = strictly preferred to (better than) e. Properties i. More is better than less 1. B1 has more of at least one good as B2 2. B1 R B2 ii. Transitivity 1. If B0 R B1 and B1 R B2 2. Then B0 R B2 iii. Average bundles are at least as good as extreme bundles 1. If B0 IN B1 and B2 is an average of B0 and B1 2. Then B2 R B0 and B2 R B1 III. Indifference Curves a. Graph that connects all the points that a consumer likes equally
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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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