The Law of Demand

Law of Diminishing M
arginal Utility
Total and Marginal Uti
lity
Theory of Consumer B
ehavior
Utility Maximizing Co
mbination
8
CHAPTER

Utility Maximization a
nd the Demand Curve
Applications and Exten
sions
Key Terms

Consumer Behavior and

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8-1
Copyright McGraw-Hill/Irwin, 2005
 THE LAW OF DEMAND
The Law of Demand
Law of Diminishing M
A Closer Look…
The Income Effect
arginal Utility
Total and Marginal Uti
lity
Theory of Consumer B
ehavior
A lower price frees income
Utility Maximizing Co
mbination for additional purchases -
Utility Maximization a
nd the Demand Curve and vice versa
Applications and Exten
sions
Key Terms
The Substitution Effect
A lower price relative to other
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goods attracts new buyers -
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and vice versa
8-2
Copyright McGraw-Hill/Irwin, 2005
 LAW OF DIMINISHING
The Law of Demand MARGINAL UTILITY
• Utility Defined
Law of Diminishing M
arginal Utility
Total and Marginal Uti
lity
Theory of Consumer B
ehavior
Utility Maximizing Co
• Subjective Nature
• Difficult to Quantify
mbination
Utility Maximization a
nd the Demand Curve
Applications and Exten

Total Utility
sions
Key Terms

Previous Next
Marginal Utility
Slide
End
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Slide

graphically examined..
8-3
Copyright McGraw-Hill/Irwin, 2005
 TOTAL AND MARGINAL UTILITY
Tacos Total Marginal
The Law of Demand consumed Utility, Utility, 30

Total Utility (utils)

Law of Diminishing M per meal Utils Utils
arginal Utility
20
Total and Marginal Uti
lity
Theory of Consumer B
0 0
ehavior
Utility Maximizing Co
1 10 10

mbination
Utility Maximization a
nd the Demand Curve
Applications and Exten 0 1 2 3 4 5 6 7
sions
Units consumed per meal

Marginal Utility (utils)

Key Terms 10
8
6
4
2
Previous Next 0
Slide Slide -2
End 1 2 3 4 5 6 7
Show Units consumed per meal
8-4
Copyright McGraw-Hill/Irwin, 2005
 TOTAL AND MARGINAL UTILITY
Tacos Total Marginal
The Law of Demand consumed Utility, Utility, 30

Total Utility (utils)

Law of Diminishing M per meal Utils Utils
arginal Utility
20
Total and Marginal Uti
lity
0 0
Theory of Consumer B
10
ehavior
Utility Maximizing Co
1 10 10

mbination
Utility Maximization a
nd the Demand Curve
Applications and Exten 0 1 2 3 4 5 6 7
sions
Units consumed per meal

Marginal Utility (utils)

Key Terms 10
8
6
4
2
Previous Next 0
Slide Slide -2
End 1 2 3 4 5 6 7
Show Units consumed per meal
8-5
Copyright McGraw-Hill/Irwin, 2005
 TOTAL AND MARGINAL UTILITY
Tacos Total Marginal
The Law of Demand consumed Utility, Utility, 30

Total Utility (utils)

Law of Diminishing M per meal Utils Utils
arginal Utility
20
Total and Marginal Uti
lity
0 0
Theory of Consumer B
10
ehavior
1 10 10
Utility Maximizing Co
8
2 18
mbination
Utility Maximization a
nd the Demand Curve
Applications and Exten 0 1 2 3 4 5 6 7
sions
Units consumed per meal

Marginal Utility (utils)

Key Terms 10
8
6
4
2
Previous Next 0
Slide Slide -2
End 1 2 3 4 5 6 7
Show Units consumed per meal
8-6
Copyright McGraw-Hill/Irwin, 2005
 TOTAL AND MARGINAL UTILITY
Tacos Total Marginal
The Law of Demand consumed Utility, Utility, 30

Total Utility (utils)

Law of Diminishing M per meal Utils Utils
arginal Utility
20
Total and Marginal Uti
lity
0 0
Theory of Consumer B
10
ehavior
1 10 10
Utility Maximizing Co
8
2 18
mbination
Utility Maximization a
nd the Demand Curve 6
Applications and Exten
sions
3 24 0 1 2 3 4 5 6 7

Units consumed per meal

Marginal Utility (utils)

Key Terms 10
8
6
4
2
Previous Next 0
Slide Slide -2
End 1 2 3 4 5 6 7
Show Units consumed per meal
8-7
Copyright McGraw-Hill/Irwin, 2005
 TOTAL AND MARGINAL UTILITY
Tacos Total Marginal
The Law of Demand consumed Utility, Utility, 30

Total Utility (utils)

Law of Diminishing M per meal Utils Utils
arginal Utility
20
Total and Marginal Uti
lity
0 0
Theory of Consumer B
10
ehavior
1 10 10
Utility Maximizing Co
8
2 18
mbination
Utility Maximization a
nd the Demand Curve 6
Applications and Exten 3 24 0 1 2 3 4 5 6 7
sions
4
4 28
Units consumed per meal

Marginal Utility (utils)

Key Terms 10
8
6
4
2
Previous Next 0
Slide Slide -2
End 1 2 3 4 5 6 7
Show Units consumed per meal
8-8
Copyright McGraw-Hill/Irwin, 2005
 TOTAL AND MARGINAL UTILITY
Tacos Total Marginal
The Law of Demand consumed Utility, Utility, 30

Total Utility (utils)

Law of Diminishing M per meal Utils Utils
arginal Utility
20
Total and Marginal Uti
lity
0 0
Theory of Consumer B
10
ehavior
1 10 10
Utility Maximizing Co
8
2 18
mbination
Utility Maximization a
nd the Demand Curve 6
Applications and Exten 3 24 0 1 2 3 4 5 6 7
sions
4
4 28
Units consumed per meal

Marginal Utility (utils)

Key Terms 10
2 8
5 30 6
4
2
Previous Next 0
Slide Slide -2
End 1 2 3 4 5 6 7
Show Units consumed per meal
8-9
Copyright McGraw-Hill/Irwin, 2005
 TOTAL AND MARGINAL UTILITY
Tacos Total Marginal
The Law of Demand consumed Utility, Utility, 30

Total Utility (utils)

Law of Diminishing M per meal Utils Utils
arginal Utility
20
Total and Marginal Uti
lity
0 0
Theory of Consumer B
10
ehavior
1 10 10
Utility Maximizing Co
8
2 18
mbination
Utility Maximization a
nd the Demand Curve 6
Applications and Exten 3 24 0 1 2 3 4 5 6 7
sions
4
4 28
Units consumed per meal

Marginal Utility (utils)

Key Terms 10
2 8
5 30 6
0 4

Previous Next 6 30 2
0
Slide Slide -2
End 1 2 3 4 5 6 7
Show Units consumed per meal
8 - 10
Copyright McGraw-Hill/Irwin, 2005
 TOTAL AND MARGINAL UTILITY
Tacos Total Marginal TU
The Law of Demand consumed Utility, Utility, 30

Total Utility (utils)

Law of Diminishing M per meal Utils Utils
arginal Utility
20
Total and Marginal Uti
lity
0 0
Theory of Consumer B
10
ehavior
1 10 10
Utility Maximizing Co
8
2 18
mbination
Utility Maximization a
nd the Demand Curve 6
Applications and Exten 3 24 0 1 2 3 4 5 6 7
sions
4
4 28
Units consumed per meal

Marginal Utility (utils)

Key Terms 10
2 8
5 30 6
0 4
6 30 2
Previous Next
-2 0
MU
7 28
Slide Slide -2
End 1 2 3 4 5 6 7
Show Units consumed per meal
8 - 11
Copyright McGraw-Hill/Irwin, 2005
 TOTAL AND MARGINAL UTILITY
Tacos Total Marginal TU
The Law of Demand consumed Utility, Utility, 30

Total Utility (utils)

Law of Diminishing M per meal Utils Utils
arginal Utility
Total and Marginal Uti
lity
0 0
20
Observe
Theory of Consumer B
10 Diminishing
ehavior
1 10 10
Utility Maximizing Co
8
mbination
2 18 Marginal
Utility Maximization a
nd the Demand Curve 6
Applications and Exten
sions
3 24
4
0 1
Utility
2 3 4 5 6 7

4 28
Units consumed per meal

Marginal Utility (utils)

Key Terms 10
2 8
5 30 6
0 4
6 30 2
Previous Next
-2 0
MU
7 28
Slide Slide -2
End 1 2 3 4 5 6 7
Show Units consumed per meal
8 - 12
Copyright McGraw-Hill/Irwin, 2005
 THEORY OF CONSUMER BEHAVIOR
The Law of Demand
Consumer Choice and
Law of Diminishing M
arginal Utility
Budget Constraint
Total and Marginal Uti

• Rational Behavior
lity
Theory of Consumer B
ehavior

• Clear-Cut Preferences
Utility Maximizing Co
mbination
Utility Maximization a

• Subject to a Budget
nd the Demand Curve
Applications and Exten
sions

Constraint
Key Terms

Previous Next
• Responds to Price
Changes
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End
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8 - 13
Copyright McGraw-Hill/Irwin, 2005
 THEORY OF CONSUMER BEHAVIOR
The Law of Demand Utility Maximizing Rule
Law of Diminishing M

The consumer’s money

arginal Utility
Total and Marginal Uti
lity
Theory of Consumer B
ehavior
Utility Maximizing Co
income should be allocated
so that the last dollar spent
mbination
Utility Maximization a
nd the Demand Curve
Applications and Exten
sions
Key Terms
on each product yields the
same amount of extra
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(marginal) utility.
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8 - 14
Copyright McGraw-Hill/Irwin, 2005
illustrated...
 UTILITY MAXIMIZING COMBINATION
Product A: Product B:
$ 10 income
The Law of Demand Price = $1 Price = $2
Law of Diminishing M Marginal Marginal
arginal Utility Marginal utility per Marginal utility per
Total and Marginal Uti
lity
Unit of utility, dollar utility, dollar
Theory of Consumer B product utils (MU/price) utils (MU/price)
ehavior
Utility Maximizing Co
mbination First 10 10 24 12
Utility Maximization a
nd the Demand Curve
Applications and Exten
sions
Key Terms

How should the $10

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income be allocated?
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End
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8 - 15
Copyright McGraw-Hill/Irwin, 2005
 UTILITY MAXIMIZING COMBINATION
Product A: Product B:
$ 10 income
The Law of Demand Price = $1 Price = $2
Law of Diminishing M Marginal Marginal
arginal Utility Marginal utility per Marginal utility per
Total and Marginal Uti
lity
Unit of utility, dollar utility, dollar
Theory of Consumer B product utils (MU/price) utils (MU/price)
ehavior
Utility Maximizing Co
mbination First 10 10 24 12
Utility Maximization a
nd the Demand Curve
Applications and Exten
sions
Key Terms
Examine the two
Previous Next
marginal utilities
Slide Slide
End
Show
8 - 16
Copyright McGraw-Hill/Irwin, 2005
 UTILITY MAXIMIZING COMBINATION
Product A: Product B:
$ 10 income
The Law of Demand Price = $1 Price = $2
Law of Diminishing M Marginal Marginal
arginal Utility Marginal utility per Marginal utility per
Total and Marginal Uti
lity
Unit of utility, dollar utility, dollar
Theory of Consumer B product utils (MU/price) utils (MU/price)
ehavior
Utility Maximizing Co
mbination First 10 10 24 12
Utility Maximization a
nd the Demand Curve
Applications and Exten
sions
Key Terms
Examine the two
Previous Next
marginal utilities
…per dollar
Slide Slide
End
Show
8 - 17
Copyright McGraw-Hill/Irwin, 2005
 UTILITY MAXIMIZING COMBINATION
Product A: Product B:
$ 10 income
The Law of Demand Price = $1 Price = $2
Law of Diminishing M Marginal Marginal
arginal Utility Marginal utility per Marginal utility per
Total and Marginal Uti
lity
Unit of utility, dollar utility, dollar
Theory of Consumer B product utils (MU/price) utils (MU/price)
ehavior
Utility Maximizing Co
mbination First 10 10 24 12
Utility Maximization a
nd the Demand Curve
Applications and Exten
sions
Key Terms
Decision: Buy 1
Previous Next
Product B for $2
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End
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8 - 18
Copyright McGraw-Hill/Irwin, 2005
 UTILITY MAXIMIZING COMBINATION
Product A: Product B:
$ 10 income
The Law of Demand Price = $1 Price = $2
Law of Diminishing M Marginal Marginal
arginal Utility Marginal utility per Marginal utility per
Total and Marginal Uti
lity
Unit of utility, dollar utility, dollar
Theory of Consumer B product utils (MU/price) utils (MU/price)
ehavior
Utility Maximizing Co
mbination First 10 10 24 12
Utility Maximization a
nd the Demand Curve
Applications and Exten
Second 8 8 20 10
sions
Key Terms Third 7 7 18 9
Fourth What
6 next?
6 16 8
Previous Next
Fifth 5 5 12 6
Slide Slide
Sixth 4 4 6 3
End
Show
8 - 19
Seventh 3 3 4 2
Copyright McGraw-Hill/Irwin, 2005
 UTILITY MAXIMIZING COMBINATION
Product A: Product B:
$ 10 income
The Law of Demand Price = $1 Price = $2
Law of Diminishing M Marginal Marginal
arginal Utility Marginal utility per Marginal utility per
Total and Marginal Uti
lity
Unit of utility, dollar utility, dollar
Theory of Consumer B product utils (MU/price) utils (MU/price)
ehavior
Utility Maximizing Co
mbination First 10 10 24 12
Utility Maximization a
nd the Demand Curve
Applications and Exten
Second 8 8 20 10
sions
Key Terms Third 7 7 18 9
Fourth What
6 next?
6 16 8
Fifth 5 5 12 6
Previous Next Buy one of each
Slide Slide
Sixth 4 4 6 3
End
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8 - 20
Seventh 3 3 4 2
Copyright McGraw-Hill/Irwin, 2005
 UTILITY MAXIMIZING COMBINATION
Product A: Product B:
$ 10 income
The Law of Demand Price = $1 Price = $2
Law of Diminishing M Marginal Marginal
arginal Utility Marginal utility per Marginal utility per
Total and Marginal Uti
lity
Unit of utility, dollar utility, dollar
Theory of Consumer B product utils (MU/price) utils (MU/price)
ehavior
Utility Maximizing Co
mbination First 10 10 24 12
Utility Maximization a
nd the Demand Curve
Applications and Exten
Second 8 8 20 10
sions
Key Terms Third 7 7 18 9
Fourth 6 6 16 8
Fifth
and
5
then...
5 12 6
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Next
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Sixth ($5 left)
4 4 6 3
End
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8 - 21
Seventh 3 3 4 2
Copyright McGraw-Hill/Irwin, 2005
 UTILITY MAXIMIZING COMBINATION
Product A: Product B:
$ 10 income
The Law of Demand Price = $1 Price = $2
Law of Diminishing M Marginal Marginal
arginal Utility Marginal utility per Marginal utility per
Total and Marginal Uti
lity
Unit of utility, dollar utility, dollar
Theory of Consumer B product utils (MU/price) utils (MU/price)
ehavior
Utility Maximizing Co
mbination First 10 10 24 12
Utility Maximization a
nd the Demand Curve
Applications and Exten
Second 8 8 20 10
sions
Key Terms Third 7 7 18 9
Fourth 6 6 16 8
Fifth third
5 unit
5 of
12 6
Previous
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End
Next
Slide
Sixth product
4 4 B 6 3
Show
8 - 22
Seventh 3 3 4 2
Copyright McGraw-Hill/Irwin, 2005
 UTILITY MAXIMIZING COMBINATION
Product A: Product B:
$ 10 income
The Law of Demand Price = $1 Price = $2
Law of Diminishing M Marginal Marginal
arginal Utility Marginal utility per Marginal utility per
Total and Marginal Uti
lity
Unit of utility, dollar utility, dollar
Theory of Consumer B product utils (MU/price) utils (MU/price)
ehavior
Utility Maximizing Co
mbination First 10 10 24 12
Utility Maximization a
nd the Demand Curve
Applications and Exten
Second 8 8 20 10
sions
Key Terms Third 7 7 18 9
Fourth 6
$3 left... 6 16 8
Previous Next
Fifth 5 5 12 6
Slide Slide
Sixth 4 4 6 3
End
Show
8 - 23
Seventh 3 3 4 2
Copyright McGraw-Hill/Irwin, 2005
 UTILITY MAXIMIZING COMBINATION
Product A: Product B:
$ 10 income
The Law of Demand Price = $1 Price = $2
Law of Diminishing M Marginal Marginal
arginal Utility Marginal utility per Marginal utility per
Total and Marginal Uti
lity
Unit of utility, dollar utility, dollar
Theory of Consumer B product utils (MU/price) utils (MU/price)
ehavior
Utility Maximizing Co
mbination First 10 10 24 12
Utility Maximization a
nd the Demand Curve
Applications and Exten
Second 8 8 20 10
sions
Key Terms Third 7 7 18 9
Fourth 6
$3 left... 6 16 8
Fifth 5 5 12 6
Previous
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Next
Slide Buy
Sixth both!
4 4 6 3
End
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8 - 24
Seventh 3 3 4 2
Copyright McGraw-Hill/Irwin, 2005
 UTILITY MAXIMIZING COMBINATION
Product A: Product B:
$ 10 income
The Law of Demand Price = $1 Price = $2
Law of Diminishing M Marginal Marginal
arginal Utility Marginal utility per Marginal utility per
Total and Marginal Uti
lity
Unit of utility, dollar utility, dollar
Theory of Consumer B product utils (MU/price) utils (MU/price)
ehavior
Utility Maximizing Co
mbination First 10 10 24 12
Utility Maximization a
nd the Demand Curve
Applications and Exten
Second 8 8 20 10
sions
Key Terms Third 7
Income is gone... 7 18 9
Fourth
the last dollar 6spent on6 16 8
each good gave the same
Fifth 5 5 12 6
Previous Next utility (8) per dollar
Slide Slide
Sixth 4 4 6 3
End
Show
8 - 25
Seventh 3 3 4 2
Copyright McGraw-Hill/Irwin, 2005
 UTILITY MAXIMIZING COMBINATION

The Law of Demand

Law of Diminishing M
arginal Utility
Algebraic Restatement of the
Total and Marginal Uti
lity
Utility Maximization Rule
Theory of Consumer B
ehavior
Utility Maximizing Co
mbination MU of product A MU of product B
Utility Maximization a
nd the Demand Curve
Applications and Exten
sions Price of A
= Price of B
Key Terms

8 Utils 16 Utils
Previous
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Next
Slide
$1
= $2
End
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8 - 26
Copyright McGraw-Hill/Irwin, 2005
 UTILITY MAXIMIZATION AND
The Law of Demand
THE DEMAND CURVE
Law of Diminishing M
arginal Utility Deriving the Demand Schedule
and Curve
Total and Marginal Uti
lity
Theory of Consumer B
ehavior
Utility Maximizing Co
mbination Given from the previous example schedule:
• Preferences or Tastes
Utility Maximization a
nd the Demand Curve
Applications and Exten
sions
Key Terms
• Money Income
Previous Next
• Prices of Other Goods
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End
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8 - 27
Copyright McGraw-Hill/Irwin, 2005
 UTILITY MAXIMIZATION AND
The Law of Demand
THE DEMAND CURVE
Law of Diminishing M
arginal Utility Deriving the Demand Schedule
and Curve
Total and Marginal Uti
lity
Theory of Consumer B

Create a demand schedule from the

ehavior
Utility Maximizing Co
mbination
Utility Maximization a
nd the Demand Curve
purchase decisions as the price of
Applications and Exten
sions the product is varied ...
Key Terms

Price per unit of B Quantity Demanded

$2 4
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Next
Slide 1 6
End
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8 - 28
Copyright McGraw-Hill/Irwin, 2005
Graphically…
 UTILITY MAXIMIZATION AND
THE DEMAND CURVE
Deriving the Demand Schedule
The Law of Demand
Law of Diminishing M
arginal Utility
Total and Marginal Uti
lity
and Curve
Theory of Consumer B
ehavior
Utility Maximizing Co Price per unit of Good B
$2
mbination
Utility Maximization a
nd the Demand Curve
Applications and Exten
sions
Key Terms
1

Previous Next DB
Slide Slide
End 0
Show 4 6
8 - 29 Quantity Demanded of Good B
Copyright McGraw-Hill/Irwin, 2005
 UTILITY MAXIMIZATION AND
THE DEMAND CURVE
Deriving the Demand Schedule
The Law of Demand
Law of Diminishing M
arginal Utility
Total and Marginal Uti and Curve
Income and
lity
Theory of Consumer B
ehavior
$2 Price per unit of Good B
Substitution Effects
Utility Maximizing Co
mbination
Utility Maximization a
nd the Demand Curve

Revisited
Applications and Exten
sions
Key Terms
1

Previous Next DB
Slide Slide
End 0
Show 4 6
8 - 30 Quantity Demanded of Good B
Copyright McGraw-Hill/Irwin, 2005
 APPLICATIONS AND EXTENSIONS
The Law of Demand
Law of Diminishing M
DVDs and DVD Players
The Diamond-Water
arginal Utility
Total and Marginal Uti
lity
Theory of Consumer B
ehavior
Utility Maximizing Co
Paradox
mbination
Utility Maximization a
nd the Demand Curve
The Value of Time
Applications and Exten
sions Medical Care Purchases
Key Terms

Cash and Noncash Gifts

Previous Next
Slide Slide
End
Show
8 - 31
Copyright McGraw-Hill/Irwin, 2005
income effect
substitution effect
utility
total utility
marginal utility
law of diminishing marginal utility
rational behavior
budget constraint
utility-maximizing rule
Copyright McGraw-Hill/Irwin, 2005 BACK END
The Law of Demand
Law of Diminishing M
arginal Utility
Total and Marginal Uti
lity
Theory of Consumer B
ehavior
Utility Maximizing Co
mbination
Utility Maximization a
nd the Demand Curve
Applications and Exten
sions
Key Terms

Previous Next
Slide Slide
End
Show
8 - 33
Copyright McGraw-Hill/Irwin, 2005
The Law of Demand
Law of Diminishing M
arginal Utility
Next…
Total and Marginal Uti
lity
Theory of Consumer B
ehavior
Utility Maximizing Co
mbination
Utility Maximization a
nd the Demand Curve
Applications and Exten
sions
Key Terms

Previous
Slide
Next
Slide
Indifference Curve Analysis
End
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8 - 34
Copyright McGraw-Hill/Irwin, 2005