Chapter 5. Applying Consumer Theory Deriving Demand Curve Chapter 4. Consumer Choice Constrained Consumer Choice Constrained consumer choice Consumers maximize their well-being (utility) subject to budget constraints. Slope of indifference curve (MRS) = Slope of budget constraint (MRT) Consumer maximization subject to budget constraint The slope of Indifference curve equals slope of budget curve MRS= =- Pz/PB =MRT Chapter 5. Applying Consumer Theory Deriving Demand Curve Deriving Demand Curve Y=$419 Pb=$12 Pw=$35 MRT=-12/35=-1/3 Pb=$6 MRT=-6/35 -1/6 Pb=$4 MRT=-4/35 -1/9 Effect of a rise in income Examine how an increase in income, when all prices are held constant, causes a shift of the demand curve. Income-consumption curves and income elasticities Quiz #10 Draw two graphs, one directly above the other. On the upper graph, label the vertical axis Good Y and label the horizontal axis Good X. On the lower graph, label the vertical axis the Price of good X and label the horizontal axis Good X. In the upper graph, show the different levels of equilibrium points as price of good X decreases while everything else (income and price of good Y) stays the same, using the indifference curve and budget constraint. Assuming both are normal goods, draw the corresponding demand curve for Good X in the lower graph. Explain.