Possibilities, Preferences and Choices, ch. 8

# Possibilities, Preferences and Choices, ch. 8 -...

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Possibilities, Preferences and Choices, ch. 8 I. Preferences and Indifference Curves 1. Indifference curve a. Line that shows combinations of goods among which consumer is indifferent b. Marginal Rate of Substitution 1. Rate at which person will give up good y to get additional unit of good x at same time remain indifferent 2. Magnitude of slope of curve measures marginal rate of substitution a. If indifference curve is steep, marginal rate of substitution is high b. If indifference curve is flat, marginal rate of substitution is low 3. Diminishing marginal rate of substitution a. General tendency for person to be willing to give up less of good y to get one more unit of good x, and at same time remain indifferent as quantity of x increases ii. Your Own Diminishing Marginal Rate of Substitution 1. Tightness of bend of indifference curve tells how willing person is to substitute goods c. Degree of Substitutability 1. Close Substitutions a. When two goods perfect substitutions, indifference curves straight lines that

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## This note was uploaded on 05/06/2009 for the course MGMT 25100 taught by Professor Blanchard during the Spring '09 term at Purdue.

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Possibilities, Preferences and Choices, ch. 8 -...

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