budget_constraints - Budget Constraints and Indifference...

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Budget Constraints and Indifference Curves budget constraint - maximum combination of goods the consumer can buy given his income EX) income= $100, price of book= $5, price of pizza= $10 slope = rise/run opportunity cost - what consumer must give up to attain one more unit of the good to gain one more pizza ($10), the consumer must give up 2 books ($5*2) slope= opp cost of the good on the horizontal axis slope= relative price (price of pizza/ price of book) slope= amount of books consumer must give up to gain an additional pizza
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indifference curve - combination of goods among which consumer is indifferent (bundles yield same level of utility) #1) why this shape (convex )?- people prefer mix to extremes DVDs and CDs are of comparable worth. The consumer would prefer to have 5 CDs and 5 DVDs than 9 CDs and 1 DVDs. The consumer might be indifferent between having 5 CDs and 5 DVDs and having 10 CDs and 1 DVD. Prefer? 5 CDs, 5 DVDs 9 CDs, 1 DVD 5 CDs, 5 DVDs 10 CDs, 1 DVD 5 CDs, 5 DVDs 1 CD, 9 DVDs 5 CDs, 5 DVDs 1 CD, 10 DVDs 2
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#2) non-satiation - more is better higher utility is achieved as indifference curves move to the northeast from the origin #3) indifference curves cannot cross #4) indifference curves cannot become upward-sloping 3
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Marginal rate of substitution slope of indifference curve= marginal rate of substitution (MRS) (ignore negative sign)
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This note was uploaded on 09/13/2009 for the course PAM 2040 taught by Professor Lewis during the Spring '07 term at Cornell University (Engineering School).

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budget_constraints - Budget Constraints and Indifference...

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