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Unformatted text preview: ECON1110 TA Section 7 Professor Jennifer Wissink TA Jingxian Zheng March 5, 2009 1 Concepts Review 1. Preference • " B ": a bundle of goods: specifies exact quantities of all possible goods and services a consumer cares about. • " R ": at least as good as: B R B 1 • " IN ": indifferent to: B IN B 1 → B R B 1 & B 1 R B • " P ": Strictly preferred to: B IN B 1 → B R B 1 & not B 1 R B 3 Assumptions in Preference: • More is better than less: B 1 has more of at least one good than B : B 1 R B • Transitivity: If B R B 1 and B 1 R B 2 → B R B 2 • Average bundles are at least as good as extreme bundles. e.g.: Extreme bundles B = (2 X, Y ) , B 1 = (0 X, 2 Y ) , Average bundle of B B 1 is B 2 = (1 X, 1 Y ) , B 2 R B and B 2 R B 1 . 2. Indifference Curve: Connects all of the points that a consumer like equally. 5 Properties of ICs(refer counterexamples in lecture notes): • Every bundle lives on some IC. • ICs never slope-up (non-positive or negative slope) • ICs never cross • ICs never "bowed-out" • Better bundles are on ICs to north-east 3. Marginal Rate of Substitution (MRS) MRS xy = |slope of IC|=-slope of IC OR MRS xy = 4 Y 4 X • X in the horizontal axis and Y in the vertical axis • Intuition: To obtain one more unit of X, the units of Y the consumer will give up (think about MOC) • MRS xy declines: law of diminishing MRS—-As more of good X is consumed, the rate at which a person is willing to sacrifice good Y (to get more of good X) declines.at which a person is willing to sacrifice good Y (to get more of good X) declines....
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- Fall '08