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note - ch 8

# note - ch 8 - Econ 251 Fall 2009 Handout 13 Chapter 8...

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Econ 251 Fall 2009 Handout 13 10/01/09 1 Chapter 8 – Possibilities, Preferences and Choices I. PREFEREglyph817CE Aglyph817D Iglyph817DIFFEREglyph817CE CURVES Def. Indifference Curve (IC) = curve that shows the combinations of goods among which a consumer is indifferent (i.e. all the consumption choices generate the same level of utility). Ex. : Graphically : (1) The Indifference Curve _________________ _______________________ barb2right need to give up some hot chocolate to get more donuts and still end up with the same level of happiness Slope IC = Def. Marginal Rate of Substitution (MRS) = the rate at which a person gives up good y to get an additional unit of good x and at the same time remain indifferent. barb4right __________________________________________________________ (by definition MRS is a positive number)

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Econ 251 Fall 2009 Handout 13 10/01/09 2 Example : (2) The slope of the indifference curve _________________________________________ => The MRS ______ as we consume more of the ‘X’ good ( __________________________ ) This explains why the indifference curves are generally bowed toward the origin. The preferences of each consumer can be represented by a whole family of indifference curves : All the combinations of donuts and hot chocolate _______________________________ to those on the indifference curve All the combinations of donuts and hot chocolate _______________________________ to those on the indifference curve (3) ____________________________________________________________
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