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0 1 2 3 4 5 6 7 8 9 10 11 12 01234567891011121314151617181920212223 Indifference Curves Popsicles per week Ice cream sandwiches per week Which bundle,

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Presentation on theme: "0 1 2 3 4 5 6 7 8 9 10 11 12 01234567891011121314151617181920212223 Indifference Curves Popsicles per week Ice cream sandwiches per week Which bundle,"— Presentation transcript:

1 Indifference Curves Popsicles per week Ice cream sandwiches per week Which bundle, A, B, C, D, E, or F is the most preferred? Why? A B C D E F

2 Indifference Curves Popsicles per week Ice cream sandwiches per week Which bundle is the most preferred? A B C D E F D – It is located on the indifference curve that is the farthest from the origin.

3 Indifference Curves - 2 Popsicles per week Ice cream sandwiches per week Which curve on the indifference map represents the lowest level of utility? A B C D E F

4 Indifference Curve -2 Popsicles per week Ice cream sandwiches per week Which curve on the indifference map represents the lowest level of utility? A B C D E F Blue curve – It is the closest to the origin.

5 Consumption Bundles Popsicles per week Ice cream sandwiches per week Which bundle provides the greater satisfaction B or E? A B C D E F

6 Consumption Bundles Popsicles per week Ice cream sandwiches per week A B C D E F Neither – They are on the same indifference curve. Which bundle provides the greater satisfaction B or E?

7 MRS Popsicles per week Ice cream sandwiches per week If a consumer is willing to give up 3 popsicles in exchange for 1 ice cream sandwich, what is his marginal rate of substitution at that point? A B C D E F

8 MRS Popsicles per week Ice cream sandwiches per week A B C D E F MRS = = 1/-3 = -1/3 sandwiches popsicles If a consumer is willing to give up 3 popsicles in exchange for 1 ice cream sandwich, what is his marginal rate of substitution at that point?

9 Maximizing Level of Consumption Popsicles per week Ice cream sandwiches per week A B C D E F Let the black line represent a consumers budget line. Which point maximizes the consumers utility subject to his/hers budget constraint?

10 Popsicles per week Ice cream sandwiches per week A B C D E F C – This is where an indifference curve is tangent to the budget line. Let the black line represent a consumers budget line. Which point maximizes the consumers utility subject to his/hers budget constraint? Maximizing Level of Consumption

11 Budget Constraint Popsicles per week Ice cream sandwiches per week A B C D E F Which points are unobtainable, given the budget constraint?

12 Budget Constraint Popsicles per week Ice cream sandwiches per week A B C D E F D and F – These bundles are above the budget line, therefore, the budget is too small to purchase them. Which points are unobtainable, given the budget constraint?

13 Slope Popsicles per week Ice cream sandwiches per week A B C D E F What is the slope of the budget constraint? Hint, since it is a linear constraint, the slope does not change over the line.

14 Slope Popsicles per week Ice cream sandwiches per week A B C D E F Use the X and y intercepts to find the slope given the hint. (11-0)/(0-15) = -11/15 What is the slope of the budget constraint?

15 Utility Maximizing Point Popsicles per week Ice cream sandwiches per week A B C D E F What is the slope of the indifference curve at point C? Hint: recall what slopes are equal at the tangency point.

16 Utility Maximizing Point Popsicles per week Ice cream sandwiches per week A B C D E F (11-0)/(0-15) = -11/15 KNOW -The slope of the indifference curve (MRS) and the slope of the budget line are the same at the tangency point. What is the slope of the indifference curve at point C?

17 Understanding Budget Constraints Popsicles per week Ice cream sandwiches per week The original budget is represented by line L 1 which amount to $33 being spent. What is the price of ice cream sandwiches in line 1? L1L1 L3L3 L2L2 L4L4 A

18 Popsicles per week Ice cream sandwiches per week L1L1 L3L3 L2L2 L4L4 A Use the idea from calculating the slope, intercept = 11 and budget =33. We know budget / price = intercept, therefore, budget / intercept =price 33/11=$3 The original budget is represented by line L1 which amount to $33 being spent. What is the price of ice cream sandwiches in line 1? Understanding Budget Constraints

19 Popsicles per week Ice cream sandwiches per week The budget for line L 1 is $33. How much money will the consumer spend if he purchases the combination of ice cream sandwiches and popsicles found at point A? Hint: you do not need to know the quantities of ice cream and popsicles. L1L1 L3L3 L2L2 L4L4 A Understanding Budget Constraints

20 Popsicles per week Ice cream sandwiches per week L1L1 L3L3 L2L2 L4L4 A $33 KNOW - the consumer will spend $33 at all points along line L 1. The budget for line L 1 is $33. How much money will the consumer spend if he purchases the combination of ice cream sandwiches and popsicles found at point A? Understanding Budget Constraints

21 Understanding Budget Constraints Popsicles per week Ice cream sandwiches per week L1L1 L3L3 L2L2 L4L4 A Which line represents a 50 percent decrease in the consumers budget from line L 1 ?

22 Test Yourself Popsicles per week Ice cream sandwiches per week L1L1 L3L3 L2L2 L4L4 A L 4 – It is a parallel shift half the distance to the origin. Which line represents a 50 percent decrease in the consumers budget from L 1 ? Understanding Budget Constraints

23 Test Yourself Popsicles per week Ice cream sandwiches per week What happened that caused the shift from L 1 (budget $33) to L 3 ? L1L1 L3L3 L2L2 L4L4 A Understanding Budget Constraints

24 Test Yourself Popsicles per week Ice cream sandwiches per week L1L1 L3L3 L2L2 L4L4 A The price of ice cream sandwiches increased to $5.50 but the price of popsicles did not change, same x-axis intercept. $33/6= $5.50 What happened that caused the shift from L 1 (budget $33) to L 3 ? Understanding Budget Constraints

25 Your friend believes that indifference curves are upward sloping. Is she correct? Why or why not? Thought Question

26 He/she is incorrect. Indifference curves are downward sloping and convex to the origin. An indifference curve shows all of the possible combinations of two goods that provide the same utility (satisfaction). Since consumers always prefer more to less, an upward sloping curve would not make sense. Your friend believes that indifference curves are upward sloping. Is he correct? Why or why not?

27 You have the option to chose between three bundles of Mac and PC laptops. All bundles are on the same indifference curve. Do you choose the bundle with more Mac laptops, the bundle with more PC laptops, or the bundle with the combination of laptops that provide the most RAM? Why? Do You Understand

28 You would not care. All bundles are equally good because they are on the same indifference curve. However, you would chose the bundle that is obtainable given your budget constraint. You have the option to chose between three bundles of Mac and PC laptops. All bundles are on the same indifference curve. Do you choose the bundle with more Mac laptops, the bundle with more PC laptops, or the bundle with the combination of laptops that provide the most RAM? Why? Do You Understand


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