ECO100Y5 Lecture Notes - Lecture 1: Indifference Curve, Demand Curve
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ECO100Y5 Full Course Notes
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The slope of the budget line is the opportunity cost (the o-cost). The slope of an indifference curve is the marginal rate of substitution (the mrs). Optimal choice require tangency (equal slope) this means that the mrs should be set equal to the o-cost. Figure 6a-7: when faced with alternative plans, a maximizing consumer will pick the plan with the highest utility. Goods that are perfect complements have l-shaped indifference curves. Per-unit taxes and subsidies rotate the budget line like price changes. Lump sum taxes and subsidies shift the budget line like income changes.
