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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
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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)
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  • Fall '15
  • ANDREWPAIZIS
  • Utility

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