Micro - Lecture 7 (Indifference Curves) Flashcards
1
Q
What is an indifference curve?
A
A curve showing combinations of two goods that provide the same utility.
2
Q
What are the properties of indifference curves?
A
Downward sloping: More of one good requires less of the other.
Do not cross: Ensures consistent preferences.
Convex to the origin: Reflects diminishing
marginal rate of substitution (MRS).
3
Q
What is the marginal rate of substitution (MRS)?
A
The rate at which a consumer substitutes one good for another while maintaining utility.
Formula: MRS = utlity of Y / utility of X
4
Q
What is the equation for a budget line?
A
M = PxX + PyY
Rearranged as:
Y = M/Py - (Px/Py)X
5
Q
What is the tangency condition for optimal choice?
A
Optimal choice occurs where the budget line is tangent to the highest indifference curve.
