Econ100A.Sep13 - Econ 100A - Economic Analysis -...

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Econ 100A - Economic Analysis - Microeconomics Raphaël Giraud 1 University of Franche-Comté (France) 2 Visiting Assistant Professor at Berkeley University 3 ragiraud@berkeley.edu Raphaël Giraud Intermediate Microeconomics
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± ² ³ ´ Menu du jour September 13: Consumer Theory: Describing Tastes and Constraints (cont’d). Readings: PR3 1,2 Raphaël Giraud Intermediate Microeconomics
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Preferences Classical Examples of Preferences: Perfect Substitutes Definition Two goods are perfect substitutes (in the preference sense) if the MRS between these two foods is constant (i.e. does not depend on the commodity bundle where it is evaluated): there exists a number k > 0 such that, for all commodity bundles X = ( x 1 ,x 2 ) , it is the case that MRS 12 ( X ) = k. In other words, it always possible to replace k units of good 2 by one unit of good 1. Examples: Good 1: 12-months-lasting bulb; Good 2: 6-months-lasting bulb. Good 1: A branded drug; Good 2: the same drug with the generic brand. Raphaël Giraud Intermediate Microeconomics
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Preferences Classical Examples of Preferences: Perfect Substitutes Good 2 Good 1 - k Fig.: Perfect Subtitutes Raphaël Giraud Intermediate Microeconomics
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Preferences Classical Examples of Preferences: Perfect Complements Some goods can only be consumed together with other goods: bolts and screws; right and left shoes; coffee and sugar (for those who like their coffee with sugar). The proper definition is as follows: Definition Two goods are perfect complements if they must be consumed in fixed proportions. Notice that DVDs and DVD players are not complement in this sense, although they are complements in a weaker sense: unless you want to plays the DVDs at the same time, you don’t one DVD player for each DVD. Raphaël Giraud Intermediate Microeconomics
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Preferences Classical Examples of Preferences: Perfect Complements x 2 = 2 x 1 Good 2 Good 1 Fig.: Perfect Complements Raphaël Giraud Intermediate Microeconomics
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Outline Utility functions Raphaël Giraud Intermediate Microeconomics
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Utility Functions Intuition When comparing different objects, it is a current and useful practice to grade them: grade assignments, grade students, grade ice skaters, grade electronic devices is a catalog according to their quality. These grades do not have a meaning per se; they only mean that object A is preferred to object B (for the relevant purposes) if and only if A ’s grade is greater than B ’s grade. The notion of a utility function is based on this idea. Raphaël Giraud Intermediate Microeconomics
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Utility Functions Definition Definition (Utility Function) A utility function associated to the preference relation % is a function that assigns to each commodity bundle X a number U ( X ) such that: X % Y if and only if U ( X ) U ( Y ) The function U is said to represent % . A utility function is therefore like a grading scheme for
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Econ100A.Sep13 - Econ 100A - Economic Analysis -...

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