econ 11 notes

econ 11 notes - Utility Function: o Measures the well-being...

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Utility Function: o Measures the well-being of a consumer received from a certain consumption bundle X Indifference Curves: o Graphical representation of preferences illustrated by the utility function o For any value of u, IC collects all consumption bundles that attain that utility level o Defines an “implicit function” between x and y o Never cross because o By monotonicity: B>A and D>C o Since they are on the same IC’s: A~D and B~C o But then B>A~D>C~B – contradiction o Ex: John’s U(h,s) = hs and IC for a utility level 4 is characterized by the equation 4 = hs Marginal Rate of Substitution: o Measures the rate at which we have to substitute x for y to maintain the same level of utility o Equal to the negative indifference curve’s slope o Measures the marginal increase of utility in response to a small increase in x or y o Convex when: MRS is decreasing in x and increasing in y Monotonicity: o For 2 bundles x and y, if xn>_yn for all n, then x is at least as good as y (and
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This note was uploaded on 03/15/2008 for the course ECON 11 taught by Professor Cunningham during the Winter '08 term at UCLA.

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econ 11 notes - Utility Function: o Measures the well-being...

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