Introduction To Microeconomics Class 4 PDF

Introduction to Microeconomics Class 4 Optimal Choice: The Marginal Rate of Substitution (MRS) Condition What determines consumption? - Indi¤erence curves (ICs) - Budget constraint (BC) [Figures 4.1a and 4.1b] What determines consumption? - Indi¤erence curv...

Introduction to Microeconomics Class 4 Optimal Choice: The Marginal Rate of Substitution (MRS) Condition What determines consumption? - Indi¤erence curves (ICs) - Budget constraint (BC) [Figures 4.1a and 4.1b] What determines consumption? - Indi¤erence curves (ICs) - Budget constraint (BC) - Behavior is optimization assumption Where is the optimum? [Figure 4.2] Result: Optimal allocation 1) on the budget line 2) on di¤erence curve furthest from ori- gin (that touches the budget line) Result: At the optimal choice IC just touches the BC [Figure 4.2] The "optimum" is our prediction (as economists!) of what the consumer will do What happens to optimal choice when income increases? [FIGURES EXTRA 1a, 1b, 1c] What happens to optimal choice when price of good 1 increases? [FIGURES EXTRA 2a, 2b, 2c] Above we pursued a graphical descrip- tion of the optimum. - How to describe the optimum formally? From Class 3 we know that: p1 Slope of BC: p2 x2 Slope of IC: x1 (