Consumer Theory

Consumer Theory - Main Concepts: Budget line Preferences...

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1 Main Concepts: ± Budget line ± Preferences and indifference curves ± Principle of diminishing marginal rate of substitution ± Effects of changes in prices and income on consumption choices ± Substitution and income effect ± Supply of labor Cases for chapter 9: ± How do gasoline prices impact the housing market? ± Why are dentists so happy?
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2 Consumption Possibilities The budget line describes the limits to the household’s consumption choices. Consumption Possibilities The Budget Equation: P a Q a + P b Q b = Y. Or: Q a = Y/P a –( P b /P a )Q b The term Y/P a is real income in terms of good a. The term P b /P a is the relative price of good b in terms of good a.
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3 Preferences and Indifference Curves An indifference curve is a line that shows combinations of goods among which a consumer is indifferent . Preferences and Indifference Curves The marginal rate of substitution , ( MRS ) measures the rate at which a person is willing to give up one good (good y) , to get an additional unit of another good (
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Consumer Theory - Main Concepts: Budget line Preferences...

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