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Unformatted text preview: statement? IT’S THE BASIS OF THE SUBSTITUTION EFFECT. YOU CAN EXPLAIN IT VIA THE EQUIMARGINAL PRINCIPLE (THE INEQUALITY IN QUESTION 1B). .. P X DROPS SO CONSUME MORE OF X TILL EQUALITY IS REACHED. 3) Using an indifference map, show how a demand curve can be derived. The diagram is in Lipsey All other goods PX Good X P1 P2 DD X Q X For further discussion: Indifference curves One of the features of an indifference map is that two indifference curves cannot cross each other. Explain why. [Hint: start off with two indifference curves that do cross each other, and show that the outcome is logically perverse.] a b c All about consistency(transitivity) – if a preferred to b and b preferred to c, then a must be preferred to c But this can’t happen if they are on the same indifference curve....
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This note was uploaded on 02/28/2012 for the course ECO 1010F taught by Professor Catherinekannemeyer during the Spring '11 term at University of Cape Town.
- Spring '11