31 - Indifference Curves and Budget Lines

Question 2

Indifference Curve

Answer 2

shows all of the possible combination of goods that give the consumer equal satisfaction

Question 3

How to calculate the slope of an IC curve

Slope of the Indiffrence curve is called

Answer 3

MRS = Marginal Rate of Substitution

Change in Y/ Change in X

Question 4

What is the marginal rate of substitution

Answer 4

the rate at which the consumer is willing to substitute one good for another

IC - MRS is decreasing because of law of diminishing rate of substitution. One wants to give up less and less of good ‘A’ to gain additional unit of good ‘B’

Question 5

2

Assumptions of an indiffernce curve

Answer 5

• Income is fixed
• Consumers cannot buy every combination of the 2 good due to money constarints

Question 6

Budget Line

When does BL parallel shift and when does BL pivot

Answer 6

shows all the possible combination of goods that can be purchased with a given income and given prices

change in price of 1 product –> pivotal shift
change in income –> parallel

Question 7

Consumers equilibrium using IC-BL

Answer 7

When a consumers willingness to consume = their ability to consume
(slope of IC = slope of BL)
BL tanget to IC