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7 Cards in this Set

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Interior Solution: With a concave utility funciton and a linear budget line, there will be a unique interior solution
1) Geomatrically, this is the tangency between the budget line and an indiffernce curve

2) Algebraically, use MUx/MUy=PxX+PyYI to solve for X and Y
Coner Solutions: Cases where the best bundle does not satisfy the tangency condition.

Def →
The budget line reaches the highest achievable indiffernce curve along an axis (so only one of the two goods is consumed) or at a kink.

Although the corner bundle is the best affordable bundle, the tangency condition will not hold.
Normal Goods; Def →
Goods that experienc increases in quantity consumed in response to increases in the consumer's real income. In Math Terms, it is;

εx,I = ∆Q/Q
∆I/I

For a normal good, n1 >0

X, Y, are both normal goods and Px, Py are the prices
Finer gradations of normal goods

Necessity →
n1<1
good is a declining share of total expenditure as income increases
Finer gradations of normal goods

Luxury →
n1>1

A good is an increasing share of total expenditure as income increases
Inferior Goods; Def →
Goods for which quantity consumed decrweases in response to increases in the consumer's real income. That is, goods with n1<0
Inferior Good; Def →
Goods for which quantity consumed decreases in response to increases in the consumer's real income. That is, goods with n1<0

Graph (see notes - Lecture 7)