Consumer Preferences Marginal rate of Substitution a We will now add a fourth assumption regarding consumer preference o Along an indifference curve there is a diminishing marginal rate of substitution e Note the mrs for ab was 6. while that for de was 2 Chapter 3: Consumer Behavior Slide 26
Chapter 3: Consumer Behavior Slide 26 Consumer Preferences ◼ We will now add a fourth assumption regarding consumer preference: ⚫ Along an indifference curve there is a diminishing marginal rate of substitution. ◆Note the MRS for AB was 6, while that for DE was 2. Marginal Rate of Substitution
Consumer Preferences Marginal rate of Substitution ■ Question What are the first three assumptions? Chapter 3: Consumer Behavior Slide 27
Chapter 3: Consumer Behavior Slide 27 Consumer Preferences ◼ Question ⚫ What are the first three assumptions? Marginal Rate of Substitution
Consumer Preferences Marginal rate of Substitution Indifference curves are convex because as more of one good is consumed, a consumer would prefer to give up fewer units of a second good to get additional units of the first one Consumers prefer a balanced market basket Chapter 3: Consumer Behavior Slide 28
Chapter 3: Consumer Behavior Slide 28 Consumer Preferences ◼ Indifference curves are convex because as more of one good is consumed, a consumer would prefer to give up fewer units of a second good to get additional units of the first one. ◼ Consumers prefer a balanced market basket Marginal Rate of Substitution
Consumer Preferences Marginal rate of Substitution a Perfect substitutes and perfect Complements o Two goods are perfect substitutes when the marginal rate of substitution of one good for the other is constant Chapter 3: Consumer Behavior Slide 29
Chapter 3: Consumer Behavior Slide 29 Consumer Preferences ◼ Perfect Substitutes and Perfect Complements ⚫ Two goods are perfect substitutes when the marginal rate of substitution of one good for the other is constant. Marginal Rate of Substitution
Consumer Preferences Marginal rate of Substitution a Perfect substitutes and perfect Complements o Two goods are perfect complements when the indifference curves for the goods are shaped as right angles Chapter 3: Consumer Behavior Slide 30
Chapter 3: Consumer Behavior Slide 30 Consumer Preferences ◼ Perfect Substitutes and Perfect Complements ⚫ Two goods are perfect complements when the indifference curves for the goods are shaped as right angles. Marginal Rate of Substitution