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Lecture

Chapter 21 - Consumer Theory.docx

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Department
Economics
Course
ECON 1B03
Professor
Hannah Holmes
Semester
Winter

Description
Chapter 21 Consumer Theory Changes to the Budget Constraint - If income or price change, budget constraint changes Increase in income Budget constraint shifts right (You can buy more) Decrease in income Budged constraint shifts left (You can’t buy as much) The intercepts of the graph are your income divided by the price of that good. If the price of X decreases and there`s no change in BC becomes flatter. price of Y or income You can buy more of X but not more of Y. If the price of Y decreases and there`s no change in BC becomes steeper price of X or income You can buy more of Y but not more of X. If Price of X and Price of Y both increase at the BC will have a parallel shift left. same rate, with no change in income N If Price of X and Price of Y both decrease at the BC will have a parallel shift right same rate, with no change in income N The optimal consumption bundle is the one that maximizes a consumer’s Total Utility given their budget constraint. - To do this, you want the most Marginal Utility per Dollar Spent to maximize Total Utility. Marginal Utility per Dollar Spent - MU of X / Price of X When the MU per dollar spent is the same for both goods, buying more of one good over the other makes no difference to TU. It is at this point that Total Utility is maximized. Total Utility Maximum TU Max when MUx/Px = MUy/Py. Diminishing Marginal Utility - More of a good means lower MU - At lower quantities, MU is higher If two combinations of products and quantities give you the same total utility, you will be indifferent to both. Indifference Curve - Graph of all the combos that yield the same TU - Every point on the curve has the same TU as every other point - Higher curves have greater TU Marginal Rate of Substitution The slope at any point on an indifference curve is the Marginal Rate of Substitution (MRS) - The rate at which a consumer is willing to trade one good for another. - Depends on the MU between the two goods - MRS = MUx/MUy Properties of Indifference Curves - Higher indifference curves are preferred to lower ones
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