Lecture4 - Lecture 4 Marginal rate of substitution Marginal...

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Unformatted text preview: Lecture 4 Marginal rate of substitution Marginal utility Maximizing subject to a budget constraint Marginal Rates of Substitution The MRS gives the rate at which a consumer substitutes good X for good Y and remains at the same level of satisfaction (or, on the same indifference curve). = How many units of Y will be given up to get an additional unit of X. Diminishing marginal rates of substutition In general we expect goods to exhibit diminishing marginal rates of substitution: the more X is in the bundle relative to Y (blue lines) , the more reluctant the consumer is to give up additional Y for additional X. Alternatively, when the bundle is heavy on Y (red lines) , the consumer is eager to obtain more X , and will do so for a considerable amount of Y. The associated indifference curves are convex Y X Maximizing utility subject to a budget constraint Find point on budget line associated with highest level of utility (convex preferences): Find indifference curve tangent to the budget line...
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This note was uploaded on 01/17/2012 for the course ECON 100A taught by Professor Safarzadeh during the Fall '09 term at UC Irvine.

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Lecture4 - Lecture 4 Marginal rate of substitution Marginal...

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