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Trev3 Micro

=, slope of budegt line =

U=MU x1 + MU 2 x2

Along any indifference curve MU x1 + MU 2 x2=0

Along an indifference curve the = This is the marginal rate of substitution of good X2 for X1. is the slope of indifference curve. Where the 2 lines touch it is a utility maximizing equilibrium.

So in equilibrium occurs at


If the consumers income doubles

AB - income consumption curve. Right now its upward sloping, as income rises x2 might be consumed less. it becomes a inferior good, AB falls.

If price of x1 falls:

Our consumers money income has remained the same, but its real wage has risen (unless he is consuming only x2)

To what extent will the consumer allocate his consumption solely based on the new relative prices - substitution effect. There is also an income effect - consumer is better off.

Price, consumption line:

If we take three different relative prices of one good.

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