indifference-curve - Review of Some Concepts in...

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Unformatted text preview: Review of Some Concepts in Microeconomics Consider a standard consumption-choice problem: • There are two goods, A and B , with prices P A and P B , respectively. • There is an individual agent who consumes both goods. By consuming C A units of good A , and C B units of good B , the agent derives utility u ( C A ,C B ). • The agent has an income of $ Y . • Question: What is the optimal bundle ( C A ,C B ) the agent should buy? 1. Preferences. • The agent’s preference u ( C A ,C B )—his ranking of different combinations of the two goods—can be represented by indifference curve . A person is indifferent between two different combinations of goods A and B if he does not prefer one to another. An indifference curve shows all combinations of the two goods which the agent is indifferent. 1 • Properties of indifference curves: – Indifference curves usually slope downward: if the agent consumes less of good A , he needs to consume more of good B to stay indifferent....
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This note was uploaded on 04/06/2010 for the course ECON 0 at Pennsylvania State University, University Park.

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indifference-curve - Review of Some Concepts in...

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