08-27-08 - Econ 302: Intermediate Microeconomic Theory...

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Econ 302: Intermediate Microeconomic Theory Andres Elberg University of Illinois at Urbana-Champaign August 27, 2008 Lecture 2: Consumer Theory: Preferences August 27, 2008 1 / 29
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Part 1. Consumer Theory Lecture 2: Consumer Theory: Preferences August 27, 2008 2 / 29
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Overview Consumer theory aims at explaining how a rational agent decides to allocate her income across di/erent goods. The basic idea is that the consumer compares di/erent bundles of goods and chooses the most preferred one(s) among those that are feasible (i.e. a/ordable given her income and market prices) We& ll proceed in three steps to develop the theory: 1 We will characterize the constraint faced by the consumer (the budget constraint) 2 We will describe the way the consumer chooses between di/erent commodity bundles (consumer preferences) 3 We will ±nd the optimal consumption bundle (choice) Lecture 2: Consumer Theory: Preferences August 27, 2008 3 ² 29
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The Consumption Set There are L commodities available to the consumer. We denote by x l the quantity of good l = 1 , ..., L purchased by the consumer. The object of choice is a consumption bundle denoted by the vector ( x 1 , x 2 , ..., x L ) De&nition The consumption set, X, is the set of all possible consumption bundles the consumer can conceive X = f ( x 1 , x 2 , ..., x L ) j x 1 & 0 , x 2 & 0 , ..., x L & 0 g Lecture 2: Consumer Theory: Preferences August 27, 2008 4 / 29
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Prices Denote commodity prices by p 1 , p 2 , ..., p L We assume the consumer is a price taker, so prices are given Prices do not depend on how much the consumer chooses buy of each good Thus total expenditure on a consumption bundle is given by: p 1 x 1 + p 2 x 2 + ... + p L x L Lecture 2: Consumer Theory: Preferences August 27, 2008 5 / 29
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Consumer&s Budget Set The consumer is endowed with an income of m . A consumption bundle is a/ordable at prices p 1 , p 2 , ..., p L if p 1 x 1 + p 2 x 2 + ... + p L x L & m De±nition The consumer&s budget set is de±ned as B ( p 1 , ..., p L , m ) = f ( x 1 , x 2 , ..., x L ) 2 X j p 1 x 1 + p 2 x 2 + ... + p L x L & m g That is, the consumer&s budget set includes all a/ordable consumption bundles. Lecture 2: Consumer Theory: Preferences August 27, 2008 6 ² 29
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Consumer&s Budget Line The consumer&s budget line is the upper boundary of the budget set.
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This note was uploaded on 02/27/2009 for the course ECON 302 taught by Professor Toossi during the Fall '08 term at University of Illinois at Urbana–Champaign.

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08-27-08 - Econ 302: Intermediate Microeconomic Theory...

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