9781118041581

we have Y/X PX/PY. The trade-off between the goods along the budget

line is the inverseof the ratio of the goods’ prices. Since the price of X is twice

that of Y, by purchasing one less unit of X the consumer can purchase two addi-

tional units of Y. In short, Y/X 2.

We already have commented on the slope of the consumer’s indifference

curve. Unlike the budget line, the indifference curve’s slope is not constant.

Rather, it flattens as one moves southeast along its length. The marginal rate of

substitution (MRS)measures the amount of one good the consumer is willing

to give up to obtain a unit of the other good. In other words, MRS measures the

trade-off between the goods in terms of the consumer’s preferences. To be

124 Appendix to Chapter 3 Consumer Preferences and Demand

FIGURE 3A.2

The Consumer’s

Budget Line

The budget line shows

the combinations of

goods X and Y that can

be purchased with the

consumer’s available

income.^10

05

5

4

B

A

C

3

Quantity of Good X

Quantity of Good Y

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