Econ 1201 1st Edition Lecture 6Outline of Last Lecture – Consumer choiceI. Donut ExperimentII. Consumer Choicea. Marginal, total, diminished and maximized utility III. Graphical Analysis of UtilityOutline of Current Lecture – Behind Supply and DemandI. Graphical Analysis (Indifference Curves)II. Budget linesIII. Income and Substitution EffectCurrent LectureI. Graphical AnalysisIndifference Curves Rules:1. Convex to the origin2. Curves do not cross (if they did then they would share points)* Utility increases as you move away from the origin* Slope = MUx/MUyThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.II. Budget LinesBudget line: The combination of two goods that any consumer can buy with a given income and price** ALWAYS LINEAR **For example, if you had a budget of $100, books cost $5 and Movies cost $2.50, you could buy either 20 books or 40 movies for that price (X and Y intercepts). The budget line provides amount of any combination within those parameters. ** Note: you can not buy BOTH 20 books and 40 movies, those are just the maximum amount of each good you could buy if you did not buy any amount of the other good **Utility Maximization occurs when slope of indifference curve and budget line are equal (POINT C on graph shown below) - If you buy less of good x, you can buy more of good y (and vice versa)- When Py increases, the quantity of good y that you can buy goes down, but it doesn’t affect good x (shown in graph below). The same applies for PxIII. Income and Substitution EffectIncome Effect:- If income increases, it pushes the budget line out because now you can buy more of good x and good y (if they are normal goods) - Income effect involves the increase of “spending power”, when you feel like you have the ability to buy more goods.Substitution Effect: - As price of one good rises, consumers will replace that good with other less expensive goods (for example, inferior goods will take the place of more expensive ones).- In the graph, the move from A to B shows the substitution effect (buying more of good y and less of good x), while the move from B to C is the income effect. - Good Y represents an inferior