siides_04_H.pdf

# siides_04_H.pdf - Roadmap CONSUMER BEHAVIOR(I •...

• 7

This preview shows 1 out of 3 pages.

CONSUMER BEHAVIOR (I) 1 Roadmap Preferences and rationality axioms (today) Representation of rational preferences: utility Affordable bundles: budget set Consumer choice: utility maximization and individual demand Market demand 2 Outline (today) Representation of Rational Preferences: Utility Affordable Bundles: Budget Set 3 Outline (today) Representation of Rational Preferences: Utility Affordable Bundles: Budget Set 4

Subscribe to view the full document.

Consumer utility Util ity: numerical score representing the satisfaction that a consumer gets from a market basket Util ity func tion: utility level as a function of market basket Example: If the utility function is U ( F , C ) = F + 2 C then a market basket with 8 units of food and 3 units of clothing yields a utility of 14 = 8 + 2 × 3 5 Preferences and utility function Theorem: Preferences that satisfy Axioms 1 and 2 (cf Lecture 3) can be represented by a utility function A B if and only if U ( A ) > U ( B ) A B if and only if U ( A ) = U ( B ) An individual’s preference is represented by a unique set of indifference curves However, there are many utility functions consistent with a given individual’s preferences (or indifference curves) Why? Because utility rankings are ordinal (Kim prefers A to B ), whereas utility is a cardinal measure ( U Kim ( A ) = 34.65) But: for our purposes, all utility functions consistent with an individual’s preferences lead to the same results/predictions 6 In other words, there is no such thing as an universal utility unit. Also: cannot compare utility levels across individuals, only across bundles for a given individual Example Suppose that Lei is indifferent between the following bundles of food and clothing: (2.5,10), (5,5), (10,2.5)
You've reached the end of this preview.
• Fall '15
• ANDREWPAIZIS

{[ snackBarMessage ]}

### What students are saying

• As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

Kiran Temple University Fox School of Business ‘17, Course Hero Intern

• I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

Dana University of Pennsylvania ‘17, Course Hero Intern

• The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

Jill Tulane University ‘16, Course Hero Intern