Topic3_intmicro_preferences_part2_TW

Topic3_intmicro_preferences_part2_TW - OTHER COMMONLY USED...

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OTHER COMMONLY USED IC SHAPES Imagine that we want to make a well-behaved IC even more convex by increasing its curvature but without ever having a positive slope: If we try to make a well-behaved IC even more convex and we take it to the extreme we will get an L-shaped IC. In other words, giving the IC more curvature we will eventually get to the extreme of an L-shaped IC. So, you can think of an L-shaped IC as the extreme of curvature of the IC.
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The curvature of the IC tells us the convexity of the curve. We care about the convexity of the curve because it tells us how easy is to substitute x2 to x1. If the IC has a very strong curvature that means that it is relatively difficult to substitute x2 for x1. If the IC has less curvature then the substitution is between x2 and x1 is easier. Thus, the L- shaped IC corresponds to the case of “super convexity” where x2 and x1 cannot be substituted for each other. If we reduce the curvature of the IC we will eventually obtain a straight line. Thus, a straight IC corresponds to the case of weak convexity where x2 and x1 are easily substituted for each other. The lower the curvature of the IC the higher the substitution between x1 and x2
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The following graph shows the three IC’s consider so far: x 2 x 1 The previous graph shows us the possible IC’s . The IC’s can go from extremely convex (L-shaped IC) to weakly convex (straight IC). The well-behaved case is an intermediate case of extreme and weak convexity.
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Topic3_intmicro_preferences_part2_TW - OTHER COMMONLY USED...

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