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Unformatted text preview: Consumer choice 2 We define the marginal rate of substitution of good X for good Y as follows: What does it mean in terms of trade? Ex: MRS XY = 2 ? The MRS: slope of an IC Good X Good Y x y MRS XY = y/x = slope of IC 3 The MRS depends on current consumption Food Clothing 2 3 4 5 1 2 4 6 8 10 12 14 16 A B D E G6 1 1 1 1421 MRS = 6 MRS = 2 MRS XY =  Y/ X 4 Utility : a numerical representation of preferences If U(A)>U(B), then A is preferred to B. The ICs are the level lines of the utility function, U. Good X Good Y 1 1 2 2 U = 1 U = 4 Ex: U(x,y) = xy Consider the following bundles: A=(4,1), B=(1,2) et C=(0,5) Which one yields a higher utility ? Show graphically. *Examples If U(x,y) = xy; If U(x,y) = x + 4y; 6 Marginal Utility: MU The marginal utility of good X is the extra utility derived from the cosumption of an additional unit of X Ex: With U(x,y) = x + 4y, at A = (4,1), MU X =U X = ____ ; U(4+1,1) U(4,1) = ____....
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 Fall '08
 carl
 Microeconomics

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