Principles of Economics- Mankiw (5th) 453

Principles of - CHAPTER 21 THE THEORY OF CONSUMER CHOICE 467 Figure 21-2 Quantity of Pepsi C B D 1 A MRS I2 Indifference curve I 1 Quantity of

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CHAPTER 21 THE THEORY OF CONSUMER CHOICE 467 The slope at any point on an indifference curve equals the rate at which the consumer is willing to substitute one good for the other. This rate is called the marginal rate of substitution ( MRS ). In this case, the marginal rate of substitution measures how much Pepsi the consumer requires in order to be compensated for a one-unit reduction in pizza consumption. Notice that because the indifference curves are not straight lines, the marginal rate of substitution is not the same at all points on a given indifference curve. The rate at which a consumer is willing to trade one good for the other depends on the amounts of the goods he is already consuming. That is, the rate at which a consumer is willing to trade pizza for Pepsi depends on whether he is more hungry or more thirsty, which in turn depends on how much pizza and Pepsi he has. The consumer is equally happy at all points on any given indifference curve, but he prefers some indifference curves to others. Because he prefers more con-
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This note was uploaded on 07/30/2010 for the course ECON 120 taught by Professor Abijian during the Spring '10 term at Mesa CC.

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