Indifference Curve.pptx

Indifference map a complete set of indifference

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Indifference map - a complete set of indifference curves that summarize a consumer’s tastes or preferences

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Pizza Garlic bread IC1 IC2 IC3
(a) MRS along an Indifference curve The MRS from bundle a to bundle b is -3. This is the same as the slope of the indifference curve between those two points. From b to c , MRS = -2. This is the same as the slope of the indifference curve between those two points. Garlic Bread Indifference Curve Convex to the Origin 5 3 8 1 -1 1 1 2 0 -2 –3 3 4 5 6 Z , Pizzas a b c d I

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Willingness to Substitute Between Goods marginal rate of substitution ( MRS ) - the maximum amount of one good a consumer will sacrifice to obtain one more unit of another good. The slope of the indifference curve! G P MRS
Properties of Indifference Curve 1. IC’s are convex to the origin. Reason: Diminishing MRSxy 2. Higher IC gives higher level of satisfaction. Reason: More is Better 3. Two IC’s never intersect. Reason: Transitivity 4. IC’s slope downward. Reason: To remain indifferent a consumer must give up units of one product for extra units of another product. 5. IC’s never touch either axis Reason: consumer prefers bundle of goods and at axis only one good is available.

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Budget Line Budget Line – a line indicating all combinations of two goods that can be purchased using all of the consumer’s budget, i.e., I = X P x + Y P y Assume I = 30, P X = 1, & P Y = 2 30 15 0 30 9 12 30 6 18 30 3 24 30 0 30 Total Expenditure Y X
The Consumer’s Optimum... Quantity of Pizza Quantity Of Garlic 0 I 1 I 2 I 3 Budget constraint A B Optimum
• Fall '16

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