ECo Review_Question1 (2)

# ECo Review_Question1 (2) - 7 State algebraically the...

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7) State algebraically the condition for equilibrium in consumer indifference theory, and explain in detail what adjustments will be made if the consumer’s budget is not at equilibrium. (pg:129 – graph 4-8) MRS = Px/Py Slope of indifference curve slope of budget line If it’s not in equilibrium (e.g. the slope of the indifference curve is steeper than the slope of the budget line (MRS > Px/Py) – at point A on graph 4-8) the consumer gives up more of product Y to get one more unit of product X. He would not have to give up more of Y if he would be at the equilibrium. Therefore, the consumer will end up consuming less of Y and more of X – he is moving along the budget line and substitutes the products for each other until he reaches point C on graph 4-8 where MRS is equal to the ration of the prices – consumer equilibrium. 21) Opportunity Cost: (pg: 5) The cost of the explicit (accounting) and implicit resources that are forgone when a decision is made. It’s the value of the next-best alternative you are giving up plus the dollar value.

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ECo Review_Question1 (2) - 7 State algebraically the...

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