4- Optimization

# 4- Optimization - Combining Budgets with Tastes Next,...

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8/16/11 Combining Budgets with Tastes Next, suppose that tastes for pants and shirts are homothetic .

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8/16/11 Combining Budgets with Tastes Combining the budget with the map of indifference curves, we can then ask: “Which of the affordable bundles takes the consumer to her highest indifference curve?” The answer is bundle A which lies on the blue indifference curve. No bundle above this indifference curve is affordable.
8/16/11 The “Best” Affordable Bundle At the “best” bundle A , the slope of the budget line is equal to the slope of the indifference curve; i.e. This is true only at the “best” bundle A . At B , for instance,

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8/16/11 The MRS represents the amount (in terms of x 2 ) that we are willing to pay for 1 more x 1 . The slope of the budget line represents the The “Best” Affordable Bundle therefore implies
8/16/11 It is clear from the picture that at the best affordable bundle , but it should also make sense.

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## This note was uploaded on 08/16/2011 for the course ECON 55 taught by Professor Rothstein during the Summer '07 term at Duke.

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4- Optimization - Combining Budgets with Tastes Next,...

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