9-7-10 - Chpt 3 General rule for optimization: o Choose the...

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Chpt 3 General rule for optimization: o Choose the IC as far from the origin as possible while not exceeding budget Usual application of the general rule: o Look for bundle that sets IC and budget tangent (equal slopes) and exhausts all $$ The Usual rule is good enough if the MRS is diminishing and the ICs do not touch the axes If not, the optimm might involve a corner solution, in which a consumer buys zero of an item Chpt 1-5 week from thur and probs this Thursday o MRS = slope of budget line = ratio of prices o MRS slope of the indifference curve or how much you are willing to give up or substitute of one good for another good o your willingness to trade y for x and visa versa?? o MRS is greater than slope of budget line what should they do? Buy more x Move down the demand function an dget to a higher IC
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S 11 S15 o Two goods bread and chocolate o Budget set and a sample IC o If consumer were to consume at IC and the budget constraint what is true about the MRS? It is greater than the … so tell the consumer to exchange more bread for chocolate o Slopes are not equal iC is steeper than bline if she buys all bread than that slope of the budget line tell consumer to buy more bread but theres no more money to exchange chocolate for bread if had more money they would spend it on brad but there is not any S16 o Exception when your only buying one of the two goods o Whats MRS for this utility fxn? ½ o Slope of the budget constraint 1 o MRS on blue line is flatter than budget line Tell consumer to buy more towels
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Willingness to exchange pt for napkin is theyre willing to give up ½ a pt for a napkin Might move up to line B Move up to C S17 o Polar extreme of perfect complements o o At bundle A B = 2J
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9-7-10 - Chpt 3 General rule for optimization: o Choose the...

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