{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

Lecture4

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

This preview shows pages 1–5. Sign up to view the full content.

Lecture 4 Marginal rate of substitution Marginal utility Maximizing subject to a budget constraint

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
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). 𝑀𝑀𝑀 = −∆𝑌 ∆𝑋 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

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
Maximizing utility subject to a budget constraint Find point on budget line associated with highest level of utility
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### Page1 / 12

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

This preview shows document pages 1 - 5. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online