ECON101 Chapter 5 Outline

ECON101 Chapter 5 Outline - ECON101: Chapter 5 Outline-...

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ECON101: Chapter 5 Outline- Choice- “consumers choose the most preferred bundle from their budget sets.” 5.1 Optimal Choice Optimal choice- (x1,x2); the bundle of goods that is associated with the highest indifference curve that touches the budget line at one point (tangent) o At optimal point, the indifference curve can’t cross the budget line o “interior optimum” two exceptions for the tangency condition at optimal choice o kinky tastes: the indifference curve does not have a tangent o optimal point occurs where the consumption of some good is zero “boundary optimum” Necessary condition that optimal choice must satisfy: o In the case of convex preferences, any point that satisfies the tangency condition must be an optimal point Makes sense because convex curves curve away from budget line, cannot bend back in o Whenever the MRS is different from the price ratio, the consumer cannot be at his or her optimal choice 5.2 Consumer Demand Demanded bundle- the optimal choice of goods 1 and 2 at some set price of prices
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ECON101 Chapter 5 Outline - ECON101: Chapter 5 Outline-...

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