ECON 100A Lecture Notes - Lecture 28: Indifference Curve, Budget Constraint, Tangent
Document Summary
Let"s use a cobb douglas utility function. We know that the mrs is the slope of the indifference curve at a given point Cobb-douglas indifference curves have the property that when you go out from any ray from the origin, the marginal rate of substitution stays the same, and that"s because the. Mrs is a function that only depends on the ratio of x2/x1, and along any ray from the origin, x2/x1 is some constant depending on which ray you"re in. Slope of the budget constraint mrt = -p1/p2. Basically means that the mrs or the slope of the indifference curve at any given point must equal the price ratio (slope) Second equation with x2 in terms of x1 helps to pick the set of points with the right mrs. Combine this with level of income (budget constraint) (x1*, x2*) exhausts the budget so p1x1*+ p2x2* = m (use m instead of y) tangency means.
