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Class02_20

# Class02_20 - Class Notes(cover part of Chapter 7 in the...

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02/20/2008 Class Notes (cover part of Chapter 7 in the textbook) Class Outline Preference and Utility Maximizing Utility Predictions of Marginal Utility Theory Preference and Utility Consumer’s objective : Max Total Utility subject to budget constraint. Example: Peter has I=\$30, and consumes Donuts and Beers, whose prices are p D = \$6, p B =\$3, respectively. Table 1. Peter’s Total Utility from Consumption Possibilities of Donuts and Beers Consumption Possibilities q D TU D TU D + TU B q B TU B A 0 0 291 10 291 B 1 50 310 8 260 C 2 88 313 6 225 D 3 121 302 4 181 E 4 150 267 2 117 F 5 175 175 0 0 Peter’s total expenditure for each of the consumption possibilities in table 1 equals his income! 1

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Peter’s total utility is maximized at consumption possibility C. Accordingly he consumes 2 donuts and 6 beers. Def. Consumer’s Equilibrium The consumer’s equilibrium is a situation in which a consumer has allocated all his\her available income in the way that, given the prices of goods and services, max his\her total
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Class02_20 - Class Notes(cover part of Chapter 7 in the...

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