Chapter 21

Chapter 21 - Chapter 21: The Theory of Consumer Choice...

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Chapter 21: The Theory of Consumer Choice People face traceoffs o Buying more of one good leaves less income to buy other goods. The Budget Constraint: What the Consumer Can Afford The Slope of the Budget Constraint o Price of good on horizontal axis/price of good on vertical axis Diminishing marginal utility- ex. each extra slice of pizza isn’t as good as the previous slice Indifference curve: shows consumption bundles that give the consumer the same level of satisfaction. How much mangoes and fish create equal utility Four properties of indifference curves o Indifference curves are down sloping o Higher indifference curves are preferred to lower one. o Indifference curves cannot cross o Indifference curves are bowed inward. Marginal rate of substitution o The rate at which a consumer is willing to trade one good for another. o MRS falls as you move down along the indifference curve Indifference curve for substitutes are not bowed. Indifference curves for
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This note was uploaded on 01/22/2012 for the course ECON 102 taught by Professor Yotsubo during the Fall '08 term at Rutgers.

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Chapter 21 - Chapter 21: The Theory of Consumer Choice...

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