ECO206Y1 Lecture : Topic 4 - Choice Choice
Document Summary
Topic 4 choice (lecture 2 sept 23rd) - points on the budget constraint represent choices that fully exhaust individual"s income; - every bundle on the budget constraint is associated with an indifference curve and defines a level of utility; - the individual has to choose the bundle on the constraint that maximized the individual"s utility; - the max is given by a tangency. x1. - at point a, the slope of the indifferent curve is mrs; - at point a, the slope of the budget constraint is oc; - clearly at point a, mrs > oc; - msr>oc: how much x2 the individual is willing to give up for an additional unit of x1 (msr) is more than what they have to (oc). - move down the budget line until x2 x1. Problem: there are a lot of tangencies that satisfy this equation (a. k. a. Solution: foc 3 the tangency must lie on the budget line.
