Marginal utility and indifference curve, Microeconomics

Marginal Utility and Indifference Curve

- If the consumption of a product moves along an indifference curve, additional utility derived from the increase in consumption of single good, food (F), should balance the loss of utility from decrease in consumption in other good, clothing (C).

* Formally:

983_marginal utility and indifference curve.png

* Rearranging:  

1166_marginal utility and indifference curve1.png

  Because:

1969_marginal utility and indifference curve2.png

*  When the consumers maximize satisfaction the:

1346_marginal utility and indifference curve3.png

* Since the MRS is also equal to the ratio of the marginal utilities of consuming F and C, it follows:
1341_marginal utility and indifference curve4.png

*  Which gives equation for the utility maximization?
1510_marginal utility and indifference curve5.png

* Total utility is maximized when budget is allocated such that the marginal utility per dollar of expenditure is same for every good.

* This can be referred to as equal marginal principle.

Posted Date: 10/10/2012 6:40:46 AM | Location : United States







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