The Composite Goods Convention

The Composite Goods Convention - The Composite Goods...

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The Composite Goods Convention Let Y = expenditure on other goods . As long as we do not allow the price of “other goods to change”, then an increase in Y (expenditure on “other goods”) corresponds to an increase in the physical quantity of other goods. A. Preferences. Utility is U = U(Y,X), where Y is expenditure on other goods (= consumption of other goods) and consumption of good X. The indifference curves now reflect preferences between Y (expenditures on other goods) and X, and the MRS x for y is interpreted as the number of dollars (of expenditure on other goods) the consumer is willing to give up to get another unit of good X and be equally well off. Diminishing MRS of x for y along an indifference curve means that the number of dollars (of expenditure on other goods) the consumer is willing to give up to get another unit of X declines as X increases along the indifference curve. B. Budget Constraint
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This note was uploaded on 02/17/2011 for the course ECON 101 taught by Professor Fon during the Spring '06 term at GWU.

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The Composite Goods Convention - The Composite Goods...

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