CH3_Consumer_Choice - Intermediate Microeconomic Analysis A...

Info icon This preview shows pages 1–7. Sign up to view the full content.

View Full Document Right Arrow Icon
Intermediate Microeconomic Analysis A Consumer’s Constrained Choice Instructor: Bin Xie Spring 2015
Image of page 1

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
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.
Image of page 2
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
Image of page 3

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
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.
Image of page 4
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.
Image of page 5

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
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.
Image of page 6
Image of page 7
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern