ECON201 Lecture Notes - Lecture 8: Indifference Curve

• School: University of Waterloo
• Department: Economics
• Course: ECON201
• Professor: Ahmet Ozkardas

Document Summary

Econ 201 lec 008 - jan 22, 2019. Mrs = mu1/mu2 = 2x1* x2^3 / (3x1^2*x2^2) = 2/3 * (x2/x2) Mrs is invariant with respect to the monotone transformation. V(x) = a ln x1 + (1-a) x2. Mrs = mu1/ mu2 = (a/x1) / [(1-a) / x2] = ax2 / [(1-a) x1] Diminishing mrs: when x1 increases and x2 decreases, mrs decreases, Want to find the bundle in the budget set that is on the highest indifference curve. Bundle of goods that lie on the budget line and not those beneath the budget line. We have the highest indifference curve that just touches the budget line. The choice (x1*, x2*) is an optimal choice for the consumer. The set of bundles that she prefers to (x1*, x2*) the set of bundles above her indifference curve doesn"t intersect the bundles she can afford the bundles beneath her budget line.