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Principles of Economics- Mankiw (5th) 463

Principles of Economics- Mankiw (5th) 463 - CHAPTER 21 THE...

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CHAPTER 21 THE THEORY OF CONSUMER CHOICE 477 of Pepsi falls, the consumer moves from the initial optimum, point A, to the new optimum, point C. We can view this change as occurring in two steps. First, the consumer moves along the initial indifference curve I 1 from point A to point B. The consumer is equally happy at these two points, but at point B, the marginal rate of substitution reflects the new relative price. (The dashed line through point B reflects the new relative price by being parallel to the new budget constraint.) Next, the consumer shifts to the higher indifference curve I 2 by moving from point B to point C. Even though point B and point C are on different indiffer- ence curves, they have the same marginal rate of substitution. That is, the slope of the indifference curve I 1 at point B equals the slope of the indifference curve I 2 at point C. Although the consumer never actually chooses point B, this hypothetical point is useful to clarify the two effects that determine the consumer’s decision. Notice
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