ECON-UA 1 Lecture Notes - Indifference Curve, Comparative Statics
Document Summary
Slope of indifference curve at any point is called the marginal rate of substitution (mrs) Indifference curves cannot intersect this is a really common mistake people make. Restaurant meals go down from 20 to 15. Consumer optimum is where the budget line is tangent to an indifference curve. |slope| of budget line = pr / pm. Conditions for optimum: on the budget line, mrsm,r = pr / pm. Specifically suppose: mrsm,r = 3 and pr / pm = 2. Mrsm,r tells us person"s willingness to trade movies for restaurant meals. Pr / pm (price ratio) tells us the ability to trade movies for restaurant meals. The fact that price ratio is 2 means the person is able to have pm by 2 and pr by 1. Mrs tells us person is willing to have pm by 3 and pr by 1.