# ch01_appen - Chapter 1 Appendix 1 Indifference Curve...

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1 Chapter 1 Appendix

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2 Indifference Curve Analysis Market Baskets are combinations of various goods. Indifference Curves are curves connecting various market basket combinations of goods that make an individual equally happy.
3 Assumptions about Preferences Persons can rank market baskets. Rankings are transitive. More is preferred to less. The marginal rate of substitution is diminishing.

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4 Indifference Curves and Indifference Maps
5 Figure 1A.1 Indifference Curves 60 40 B 1 50 50 B 2 U 1 U 2 U 3 Expenditure on Other Goods per Month (Dollars) 0 Gasoline per Month (Gallons) Q x

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6 The amount of expenditure on other goods that a person will give up in order to get an additional unit of one good is called the marginal rate of substitution. The Marginal Rate of Substitution
7 The Budget Constraint The budget constraint is the combination of goods that a person can afford.

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8 The Budget Constraint in Algebraic Terms I = P x Q x + Σ P i Q i Where: I is income P i is the price of good i Q i is the amount of good i purchased
9 Figure 1A.2 The Budget Constraint Expenditure on Gasoline per Month Expenditure on All Other Goods Except Gasoline per Month C 60 40 F D 100 100 A B Expenditure on Other Goods per Month (Dollars) Gasoline per Month (Gallons) 0 Q x

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10 Figure 1A.3 Consumer Equilibrium U 1 U 3 U 2 E 40 60 Expenditure on Other Goods per Month (Dollars) Gasoline per Month (Gallons) 0 Q x A B
11 Equilibrium Condition P X = MB X

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12 Figure 1A.4 Changes in Income A B Expenditure on Other Goods per Month (Dollars) Q x per Month 0 A' B'
13 Figure 1A.5 Changes in the Price of Good X A B '' B ' B Expenditure on Other Goods per Month (Dollars) 0 Q x per Month

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ch01_appen - Chapter 1 Appendix 1 Indifference Curve...

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