CH3_Consumer_Choice

# CH3_Consumer_Choice - Intermediate Microeconomic Analysis A...

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Intermediate Microeconomic Analysis A Consumer’s Constrained Choice Instructor: Bin Xie Spring 2015

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Model of Consumer Behavior Basic Assumptions 1. Individual tastes or preferences determine the amount of pleasure people derive from the goods and services they consume. 2. Consumers face constraints (or limits) on their choices. Usually it is the budget constraint. 3. Consumers maximize their well-being or pleasure from consumption subject to the budget and other constraints they face.
Preferences I To explain consumer behavior, economists assume that consumers have a set of tastes or preferences that they use to guide them in choosing between different bundles of goods. I Goods are ranked according to how much pleasure/satisfaction a consumer can get from consuming each. I Preference relations summarize a consumer’s ranking of consumption choices. I represents strict preference I represents weak preference I represents indifference

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Properties of Preferences Completeness I When facing a choice between two bundles of goods a and b , the consumer can always rank them. I a b , a b , or a b Transitivity I Consumers’ rankings are logically consistent. I If a b , b c , then a c . Nonsatiation (More is Better) I All others the same ( ceteris paribus ), more (a larger quantity of the good) is better than less (a smaller quantity of the good). I It is usually true for most people.
Properties of Preferences (Cont.) Continuity I If a b , then a - Δ a b , where Δ a is a very small amount. I A technical (mathematical) assumption. Strict Convexity I Intuitively, consumers prefer average to extremes (two goods). I Also a technical one, for mathematical purpose.

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Utility Function Utility refers to a set of numerical values that reflect the relative rankings of various bundles of goods. I The utility function is the relationship between utility measures and every possible bundle of goods. I Given a specific utility function, you can graph an indifference curve and determine exactly how much utility is gained from the consumption choices. ( What is an indifference curve?) Example Suppose there are two bundles x : q 1 = 5 and q 2 = 1 and y : q 1 = 1 and q 2 = 5.
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