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Consumption possibilities.docx

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University of Waterloo
ECON 101
Wokia Kumase

Oct 21 CHAPTER 9 Possibilities,preference and choices Consumption possibilities Only a change in prices->the budget line will change its slope Only a change in income->the budget line will swift leftward or rightward,and the slope of budget line will stay the same Real Income(the maximum quantity which you can afford with your entire income)=Income/price of the certain good, showed as the intersects of the budget line and the x-axis,y-axis Graphing consumer preferences (1)Assumptions: 1. Complete: A>B or B>A or A≈B 2. More is better: every good has a positive marginal utility so more goods can bring more satisfaction to consumers 3. Transitivity: A>B B>C => A>C (2)Indifference curve(we have so many indifference curves) Consumers will prefer I3. The area above indifference curves: preferred The area below indifference curves: not preferred Using U=(good1)*(good2) to determine the function of indifference curves. Different utilities have different indifference curves. (3) properties of indifference curves 1. Indifference curves cannot intersect Explain: assume that I1 and I2 intersect at point A (x=5,y=2). Then U1=10, apparently, U1 is not equal to U2. However, if I1 and I2 have intersect, that means U1=U2,which is a contradiction. 2. There is one and only one indifference curve that passes through each point.(same as 1) 3. Indifference curves are not thick.(should be a thin line going through each point)
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