ECON 201 Lecture Notes - Lecture 13: Budget Constraint, Marginal Cost, Indifference Curve
ECON 201 – Lecture 13 – Chapters 21
*All charts and graphs based off or replicated by Joel Han in class unless stated otherwise
MRS (Marginal Rate of Substitution)= Relative Price
An optimal bundle, slope of indifference curve is equal to the slope of the budget
constraint
oMRS = PZ/PS
MRS is the marginal benefit of another slice of pizza, to the consumer
Relative Price is marginal cost of another slice of pizza, to the consumer
At A & B, MRSZS < PZ/PS (Marginal Benefit < Marginal Cost of pizza
At C, MRSZS > PZ/PS (Marginal Benefit > Marginal Cost of pizza)
Slope = - Relative Price = - (PZ/PS)
find more resources at oneclass.com
find more resources at oneclass.com
Marginal Dollar Approach
Another approach to thinking about how a rational consumer would behave
oSuppose utility measured in utils (imaginary unit)
1 additional slice of pizza gives MUZ utils
1 additional bottle of soda gives MUS Utils
MUZ is the marginal utility of pizza: the added satisfaction of eating one more slice
Consumer would maximize utility of each dollar spent
o1 dollar on pizza gives MUZ/PZ worth of utility
o1 dollar on soda gives MUS/PS worth of utility
An optimum bundle would be represented by: (MUZ/PZ) = (MUS/PS), Marginal utility is
equal for both sides
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Econ 201 lecture 13 chapters 21. *all charts and graphs based off or replicated by joel han in class unless stated otherwise. An optimal bundle, slope of indifference curve is equal to the slope of the budget constraint: mrs = pz/ps. Mrs is the marginal benefit of another slice of pizza, to the consumer. Relative price is marginal cost of another slice of pizza, to the consumer. At a & b, mrszs < pz/ps (marginal benefit < marginal cost of pizza. At c, mrszs > pz/ps (marginal benefit > marginal cost of pizza) Slope = - relative price = - (pz/ps) Another approach to thinking about how a rational consumer would behave: suppose utility measured in utils (imaginary unit) 1 additional slice of pizza gives muz utils. 1 additional bottle of soda gives mus utils. Muz is the marginal utility of pizza: the added satisfaction of eating one more slice.
