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Department
Economics
Course
Economics 2150A/B
Professor
Hugh Cassidy
Semester
Fall

Description
Marginal Rate of Substitution (MRS) It’s the rate at which a consumer is willing to give up one good to get another, while staying indifferent. OR How many units of Y consumer is willing to give up (get) to get (give up) one unit of X, while staying indifferent. OR It’s the negative of the slope of the indifference curve. (Tangent) - On the same indifference curve MRS = MU x, y x MU y - MRS may change as the bundle changes Increasing MRS This occurs as you increase X and decrease Y willing to trade more and more for Y for one unit of X - As X goes up, |MRS| goes up The slope of the indifference curve gets steeper. - “Bowed away from origin” - Uncommon Decreasing MRS This occurs as you increase X and decrease Y willing to trade less and less Y for one more unit of X - As X goes up, |MRS| goes up The slope of the indifference curve gets flatter. - “Bowed towards the origin” - Most common Constant MRS Always willing to trade the same amount of Y for X, at any bundle - Constant MRS - Indifference curve are straight lines Indifference Curves, Goods, Bads, Neutral Good: MU>0 Bad: MU<0 Neutral: MU=0 Satiation Point: level of consumption where a good could change to a bad or neutral - You like X (MU>0) up to 3 units, and dislike it after (MU<0) Direction of Preference: Arrow showing the direction in which the utility increases Special Utility Functions Perfect Substitutes (PS) - U = ax + by - a and b are some numbers - eg. U = 2x + 3y - a = 2, b = 3 - MUx = a, MUy = b - MRS = MUx/MUy = a/b - Constant MRS - Indifference curves are straight lines Perfect Complements (PC) - U = min {ax,by} - a and b are some numbers - eg. U = min {10x, 5y} - a = 10, b = 5 - Goods must be consumed together to get any utility - Left and right shoes example - Indifference curves are L shaped - Goods are perfectly complimentary, thus you cannot substitute X
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