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INDIFFERENCE CURVES Definition: Curve that shows (graphically) the amount of utility of different combinations of good A and good

B. Assumptions: 1) Consumers attempt to maximize their utility a. Consume on the highest indifference curve 2) Transitive a. A>B, B>C, then A must be > C 3) More is preferred to less a. Consumers consume bundle furthest from the origin 4) Knowledgeable a. Consumers accept less of one good in exchange for another good 5) Law of Diminishing Marginal Rate of Substitution a. As consumers lose more and more of one good, the more theyll want of the other good to compensate -Indifference curves plot points or bundles among which the consumer is indifferent, meaning that he/she feels the same level of well-being or welfare anywhere along the curve. Plots bundles that give the same utilities. -The slope of the budget line = market trade off and relative price Slope of budget line formula: _______ = _______ Practice: Budget: $90 Before Price of magazines = $5 Quantity of magazines = 9 Price of books = $15 Quantity of books = x = 3 $90/5 = 18 max magazines, 0 books $90/15 = 6 max books, 0 magazines $90 = 9(5) + 15x, x=3 After Price of magazines = $5 Quantity of magazines = x = 8 Price of books = $10 Quantity of books = 5 $90/5 = 18 max magazines, 0 books $90/10 = 9 max books, 0 magazines $90 = 5x + 50, x=8