ECON 50 Chapter Notes - Chapter 5: Tx1, Indifference Curve, Convex Preferences
25 Mar 2017
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Put together budget set and theory of preferences to examine optimal choice of consumers. Find bundle in budget set that is on highest indifference curve. Starting from right hand corner of budget line and moving to left, moving to higher and higher indifference curves. Stop when reach highest indifference curve that just touches budget line. The set of bundles preferred to (x1*, x2*), set of bundles above indifference curve, does not intersect bundles that are affordable, which should lie beneath budget line. Optimal consumption position: where the indifference curve is tangent to budget line. What is always true: at the optimal point, the indifference curve cannot cross budget line. Indifference curve might not have tangent line, a nondifferentiable point mathematically. Second exception: optimal point occurs where consumption of some good is zero. Slope of indifference curve and slope of budget line are different, but indifference curve still doesn"t cross budget line (boundary optimum)
