Ch3-slides - Chapter Three Consumer Preferences and the...

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Consumer Preferences and the Concept of Utility Chapter Three Chapter Three
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Chapter Three Overview 1. Motivation 2. Consumer Preferences and the Concept of Utility 3. Indifference Curves 4. The Marginal Rate of Substitution 5. The Utility Function Marginal Utility and Diminishing Marginal Utility 6. Some Special Functional Forms Marginal Utility and the Marginal Rate of Substitution 1. Motivation 2. Consumer Preferences and the Concept of Utility 3. Indifference Curves 4. The Marginal Rate of Substitution 5. The Utility Function Marginal Utility and Diminishing Marginal Utility 6. Some Special Functional Forms Marginal Utility and the Marginal Rate of Substitution Chapter Three
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Motivation How to choose your car • Many choices to make • buy or lease? new or used? • sedan, sports car or a minivan? • sunroof? Four-wheel drive? • How do consumers rank the desirability of different sets of goods (ignoring the affordablity)? Chapter Three
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Consumer Preferences Consumer Preferences tell us how the consumer would rank (that is, compare the desirability of) any two combinations or allotments of goods, assuming these allotments were available to the consumer at no cost. These allotments of goods are referred to as baskets or bundles . These baskets are assumed to be available for consumption at a particular time, place and under particular physical circumstances. Chapter Three
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Consumer Preferences Preferences are complete if the consumer can rank any two baskets of goods (A preferred to B; B preferred to A; or indifferent between A and B) Preferences are transitive if a consumer who prefers basket A to basket B, and basket B to basket C also prefers basket A to basket C A B; B C = > A C A B; B C = > A C Chapter Three
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Consumer Preferences Preferences are monotonic if a basket with more of at least one good and no less of any good is preferred to the original basket. Chapter Three
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Intransitivity and Age Source: See Hirshleifer, Jack and D. Hirshleifer, Price Theory and Applications. Sixth Edition. Prentice Hall: Upper Saddle River, New Jersey. 1998. Age Number of Subjects Intransitive (%) 4 39 83 5 33 82 6 23 82 7 35 78 8 40 68 9 52 57 10 45 52 11 65 37 12 81 23 13 81 41 Adults 99 13 4 39 83 5 33 82 6 23 82 7 35 78 8 40 68 9 52 57 10 45 52 11 65 37 12 81 23 13 81 41 Adults 99 13 Chapter Three
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Ordinal and Cardinal Rankings Ordinal Rankings tells us the order in which a consumer ranks bundles • does not contain the intensity of that preference • Cardinal Rankings tells us the intensity of a consumer’s preferences • “the consumer likes bundle A twice as much as bundle B”
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Ordinal and Cardinal Rankings Students take an exam. After the exam, the students are ranked according to their performance. An ordinal ranking lists the students in order of their performance (i.e., Harry did best, Joe did second best, Betty did third best, and so on). A cardinal ranking gives the mark of the exam, based on an absolute marking standard (i.e., Harry got 80, Joe got 75, Betty got 74 and so on). Alternatively, if the exam were graded on a curve, the marks would be an ordinal ranking.
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This note was uploaded on 07/17/2008 for the course ECON 501.02 taught by Professor Yang during the Winter '08 term at Ohio State.

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Ch3-slides - Chapter Three Consumer Preferences and the...

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