9708 · 7.2
Indifference curves and budget lines flashcards
Revision flashcards for Cambridge 9708 Indifference curves and budget lines (syllabus 7.2). Flip, recall, then mark a real past-paper question.
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What is an indifference curve?
A curve showing all combinations of two goods that give the consumer the same level of utility — higher curves mean higher utility.
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Why are indifference curves convex to the origin?
Diminishing marginal rate of substitution — as you give up more of good Y, you need increasingly more of good X to maintain the same utility.
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Budget line equation?
Income = P_x·X + P_y·Y. Slope = −P_x/P_y (opportunity cost of good X in terms of Y).
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Utility-maximising condition at tangency?
MRS = P_x/P_y, equivalently MU_x/P_x = MU_y/P_y — marginal rate of substitution equals the price ratio.
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Effect of a fall in P_x?
Budget line pivots outward on the X-axis. Consumer moves to a higher indifference curve — substitution effect (more X) plus income effect (real income rises).
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Can indifference curves cross?
No — crossing would violate the assumption that higher curves represent higher utility (transitivity of preferences).
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What is an indifference curve?
A curve showing all combinations of two goods that provide a consumer with the same level of satisfaction (utility). The consumer is indifferent between any point on the curve.
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What is the Marginal Rate of Substitution (MRS)?
The rate at which a consumer is willing to give up units of one good to gain one more unit of another good, while maintaining the same level of utility. It is the slope of the indifference curve.
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What does the slope of the budget line represent?
The slope represents the ratio of the prices of the two goods (-Px/Py). It indicates the opportunity cost of one good in terms of the other; the rate at which the market allows a consumer to trade them.
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What is the condition for consumer equilibrium?
Consumer equilibrium occurs where the budget line is tangent to the highest attainable indifference curve. The condition is that the slope of the indifference curve (MRS) equals the slope of the budget line (price ratio Px/Py). So, MRS = Px/Py.
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Why is a standard indifference curve convex to the origin?
Due to the principle of the diminishing marginal rate of substitution. As a consumer has more of one good, they are willing to give up progressively less of the other good to obtain an additional unit, causing the curve to flatten out.