14-11 Consumer preferences Marginal rate of An indifference curve shows all combinations of c and substitution (MRS): C that make the consumer the amount of C equally happy. consumer would be willing to substitute for one 1 unit of G. MRS D The slope of an indifference curve at any point equals the MRSat that -1C point. C Economics ECONOMICS MANAGEMENT SCHOOL,TONGJI UNIVERSITY
Economics ECONOMICS & MANAGEMENT SCHOOL, TONGJI UNIVERSITY 14-11 An indifference curve shows all combinations of C1 and C2 that make the consumer equally happy. Consumer preferences C1 C2 IC1 IC2 1 MRS Marginal rate of substitution (MRS ): the amount of C2 consumer would be willing to substitute for one unit of C1. The slope of an indifference curve at any point equals the MRS at that point. A B D
1907 14-12 Optimization C At the optimal point, The optimal (G,C) MRS=1+r is where the budget line just touches the highest indifference curve. Economics ECONOMICS MANAGEMENT SCHOOL,TONGJI UNIVERSITY
Economics ECONOMICS & MANAGEMENT SCHOOL, TONGJI UNIVERSITY 14-12 The optimal ( The optimal (C1,C2) is where the budget is where the budget line just touches line just touches the highest the highest indifference curve. indifference curve. Optimization C1 C2 O At the optimal point, MRS = 1+r