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L3 UTILITY FUNCTION SLIDES SLIDES

# L3 UTILITY FUNCTION SLIDES SLIDES - SAME UTILITY e.g U =...

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UTILITY FUNCTION SLIDES ASSUMPTIONS ABOUT CONSUMER CHOICE NEEDED TO DERIVE THE DEMAND CURVE COMPLETENESS: For all alternatives A and B, either A > B, or B > A, or A ~ B TRANSITIVITY If A > B, and B > C, then A > C If A ~ B, and B ~ C, then A ~ C NON-SATIATION: There is always a B such that B >A

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X = quantity of good X consumed Y = quantity of good Y consumed M Good X Good Y A 0 M B M Z C Good X Good Y A 8 8
M Good X Good Y A 0 8 8 M Good X Good Y A 0 8 8 10 20 30 50 40

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INDIFFERENCE CURVE IS THE SET COMBINATIONS OF (X,Y) WHICH HAVE THE
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Unformatted text preview: SAME UTILITY, e.g. U = U(X,Y) = U(8,8) = 30 • BECAUSE UTILITY IS FIXED, A MOVE FROM ONE POINT ON THE I-CURVE MUST INVOLVE NO NET CHANGE IN UTILITY • THEREFORE [ ∂ U/ ∂ X] dX + [ ∂ U/ ∂ Y] dY = 0 • ∂ U/ ∂ X IS THE MARGINAL UTILITY OF X • MRS = - dY/ dX = [ ∂ U/ ∂ X] / [ ∂ U/ ∂ Y] • THE MRS IS THE RATIO OF THE MARGINAL UTILITY OF X AND Y X Y A 8 8 +3-2 6 30 B* 11 M M C X Y A 8 10 +3 +2 6 30 B* 11 M M C-2-2 6 8 M...
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L3 UTILITY FUNCTION SLIDES SLIDES - SAME UTILITY e.g U =...

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