Economics 1010a1 Lecture Notes - Lecture 1: Intertemporal Consumption, Homo Sapiens, Indifference Curve
Document Summary
Task 6 - optimal choice a powerful tool for analysing and predicting the behaviour of homo sapiens (but also for capuchin monkeys) is indifference curve analysis that incorporates the "equal bang for your buck" rule. This analysis strictly separates considerations concerning tastes from budgetary considerations. Preferences (= tastes) are represented by indifference curves. Affordable consumption bundles are represented by the budget set. The frontier of this budget set is called the budget constraint. Indifference curve analysis assumes that an individual selects that particular consumption bundle in the budget set that lies on the highest indifference curve (in other words, an individual chooses his/her mostly preferred consumption bundle that he/she can afford). The selection of the optimal consumption bundle satisfies a restatement of the "equal bang for your buck" rule where the marginal rate of substitution is equal to the relative price.
