● Indifference curves Slope= MRSC C D B Leisure. I 10
Indifference Curves 10
●° Margina| Rate of substitution o MRS: the minimum# of coconuts consumer is willing to give up for another unit of leisure o equal to minus slope of indifference curve o Mathematically MRS=
Marginal Rate of Substitution MRS: the minimum # of Coconuts consumer is willing to give up for another unit of leisure Equal to minus slope of indifference curve Mathematically: 11 l C U MRS U =
°° The Budget Constraint ud Not Feasible Feasible p-T·……………B h Leisure. I 12
The Budget Constraint 12
●●。 The Optimization problem o Maximize utility subject to the budget constraint by choosing i and c max(c, 7) C=wN°+p-T N°=h-l 13
The Optimization Problem Maximize utility subject to the budget constraint by choosing l and C s.t. 13 max ( , ) U C l s s C wN p T N h l = + − = −
●●° Graphical Representation o Draw indifference curves as before o Draw budget constraint as a function of leisure o Optimal choice is point in the budget set that lies on the highest indifference curve 14
Graphical Representation Draw indifference curves as before Draw budget constraint as a function of leisure Optimal choice is point in the budget set that lies on the highest indifference curve 14