ECON2201 Chapter Notes - Chapter 5: Budget Constraint, Indifference Curve, Convex Preferences

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7 Mar 2014
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As you move from right to left along the budget line, you are moving to higher and higher indifference curves, and stop when you get to the highest indifference curve that just touches the budget line. This point where they touch is labeled ( ) This is the optimal choice for the consumer because the set of bundles she prefers to her optimal point (the ones above her indifference curve) doesn"t intersect the bundles she can afford (the ones below her budget line) At this point, the indifference curve is tangent to the budget line. Some indifference curves don"t have a tangent point, such as bundles that have a kink point at the optimal choice. Other times, the optimal choice occurs where the consumption of one good is 0. Implies that while the tangency condition is necessary, it isn"t sufficient. However, it is sufficient in the case of convex preferences. Any point that satisfies tangency must be optimal.

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