Lecture B3 (2020-09-03): Making Utility More Useful

In this lecture, we continue to discuss how to interpret the shape of different indifference curves. Indifference curves are the level sets of multi-commodity utility functions, and thus understanding these shapes helps us model the different ways that individuals can prefer one option to another. We close the lecture with a discussion of how the slope of the indifference curve (marginal rate of substitution, MRS) relates to the budget constraint line and how a consumer with a mismatch between the MRS and the budget constraint line will (for goods with diminishing marginal returns) trade goods until the two are equal. This "equi-marginal principle" is a property that maximizes utility in multi-commodity situations where two goods both have diminishing marginal returns.