LectureAssignment07

# LectureAssignment07 - 1 ECONOMICS 100 Lecture Assignment #7...

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ECONOMICS 100 Lecture Assignment #7 (Consumer Theory: Indifference Approach) Source: LR11, Chapter 6 Appendix, to page 151; LR10, Chapter 6 Appendix, to page 139. Utility Theory assumes that satisfaction is measureable, in units of satisfaction (e.g., “jollies”). We move now to Indifference Theory, which only requires consumers to rank combinations of X and Y in a consistent manner. Consider a rational consumer who has a fixed income (I), and has but two goods, X and Y, which can be consumed. The prices of X and Y are given. For example: I = \$100; P(X) = \$10; P(Y) = \$5. Utilize a diagram with the quantity of X on the horizontal axis and the quantity of Y on the vertical axis to answer the following questions: 1. The Budget Line 1.1 Draw the consumer's budget line ; i.e. the line which shows the combinations of X and Y the consumer can purchase utilizing all income. 1.2 What does the slope of the budget line represent? 1.3 What happens to the budget line if P(X) falls? 1.4

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## This note was uploaded on 08/24/2010 for the course ECO 100 taught by Professor Indart during the Fall '08 term at University of Toronto.

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LectureAssignment07 - 1 ECONOMICS 100 Lecture Assignment #7...

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