AEM230_Lecture_3___Fall_2007

AEM230_Lecture_3___Fall_2007 - Lecture 3 Indifference...

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1 of Lecture 3 Professor David Lee AEM 230 / ECON 230 Indifference curves X 1 X 2 B A C PPF Points of same total utility to consumers • Consumer is indifferent between consumption bundles A, B, and C
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2 of Lecture 3 Professor David Lee AEM 230 / ECON 230 Characteristics of Indifference curves 1. Negative slope - reflects substitutability between goods X 1 X 2 A IC B
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3 of Lecture 3 Professor David Lee AEM 230 / ECON 230 Characteristics of Indifference curves 2. Convex to origin - reflects diminishing marginal utility DVDs SB tickets 10 9 1 2
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4 of Lecture 3 Professor David Lee AEM 230 / ECON 230 Characteristics of Indifference curves 3. Non-intersecting - intersecting indifference curves violate axiom of transitivity X 1 X 2 A X 1 B C IC 2 IC 1 X 2 X 2 ’’
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5 of Lecture 3 Professor David Lee AEM 230 / ECON 230 Consumers maximize utility subject to budget constraint At A: MRS (slope of IC) = MU X 1 MU X 2 = P 1 P 2 (ratio of marginal utilities) (price ratio; slope of budget constraint) (budget constraint) X 2 = Y P 2 P 1 P 2 X 1 Y = P 1 X 1 + P 2 X 2
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AEM230_Lecture_3___Fall_2007 - Lecture 3 Indifference...

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