microbook_3e-page64 - MU Y = marginal utility derived from...

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Indifference Curves x Consumption of different combinations of goods X and Y yield different levels of utility. x All points along indifference curve give the consumer the same level of utility. o Higher indiff. curves give the consumer more utility. o Lower indiff. curves give the consumer less utility. x Why are indiff. curves convex to the origin? To keep consumer’s utility constant, you must compensate him/her with increasingly larger amounts of X for each additional unit of Y that you take from them due to diminishing marginal utility. slope of an indifference curve: Y X MU MU on Substituti of Rate Marginal { MU X = marginal utility derived from the last unit of X consumed
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Unformatted text preview: MU Y = marginal utility derived from the last unit of Y consumed y x higher indiff. curve lower indiff. curve Allocating Income to Maximize Utility Utility maximizing consumers spread out their expenditures until the following condition holds: X good of price relative on Substituti of Rate Marginal { { Y X Y X p p MU MU Such a point represents the highest level of utility they can reach given their income and the prices of goods X and Y. Graphically, consumers maximize their utility at the point where their indifference curve just touches the budget constraint. y x indifference curve utility max Page 64...
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This note was uploaded on 12/29/2011 for the course ECO 311 taught by Professor Willis during the Fall '10 term at SUNY Stony Brook.

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