Chapter 5 . Choice of consumption. Optimal choice is at the point in the budget line with highest utility. The tangency solution of an indifferent curve and the budget line: MRS = – p 1 / p 2 . Fig. Basic equations: MU 1 / p 1 = MU 2 / p 2 and
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Choice of consumption
MRS = – p1 / p2.
the basic equations:
(By *Slutsky decomposition.)
or the income offer curves,
if (x1, x2) is preferred to (y1, y2),
then (tx1, tx2) is preferred to
(ty1, ty2) for any t > 0.
vertical (horizontal) income offer curves and
vertical (horizontal) Engel curves.