Chapter_02

Chapter_02 - Intermediate Microeconomics Chapter 2 Consumer...

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Intermediate Microeconomics Chapter 2 Consumer Choice
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2 Theory of choice Purposes: ± derive the demand curve ± general framework for understanding human behavior ± normative analysis of effects of various interventions in the market Three steps required: ± know what the consumer wants ± know what the consumer can ± combine preferences and constraints feasible choices
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3 Consumer theory constraints preferences choice Taking constraints into account, an individual attempts to reach the highest FEASIBLE level of satisfaction
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4 Tastes Goods = anything that affects positively an individual's level of satisfaction when consumed It is very difficult to analyze tastes for all goods, so we will simplify the model to only two goods Bundle = a combination of quantities of the two goods Will analyze consumer's preferences for bundles (i.e., for various combinations of the two goods)
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5 Consumption bundles Bundle A: 5 apples, 12 oranges Bundle B: 12 apples, 5 oranges apples A B 5 12 12 5 oranges
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6 Axioms of consumer theory 1. Completeness any two bundles A and B can be compared to each other: either A is preferred to B, or B is preferred to A, or they are equally preferred 2. Transitivity if bundle A is preferred to bundle B and bundle B is preferred to bundle C, then A is preferred to C 3. Nonsatiation (”more is better”) if bundle A has more of at least one good than bundle B (and not less of either), than A is preferred to B
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7 Indifference curves If the previous three axioms are satisfied, then there exists a preference ordering (i.e., all bundles can be placed in an order of preference) Indifference curve = set of bundles among which the individual is indifferent Thus, the level of satisfaction is constant along an indifference curve they can't intersect When analyzing goods, indifference curves always slope downwards (because of nonsatiation)
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This note was uploaded on 05/18/2008 for the course ECON 306 taught by Professor Cramton during the Fall '06 term at Maryland.

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Chapter_02 - Intermediate Microeconomics Chapter 2 Consumer...

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