Ch.3 Notes - Intermediate microeconomics Professor Yongmin Chen Topic 2 Consumer Preferences and Utility The Nature of Consumer Preferences How

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Intermediate microeconomics Professor Yongmin Chen Topic 2. Consumer Preferences and Utility The Nature of Consumer Preferences How consumers make choices is an important question. To answer this, we first need to know the nature of consumer preferences. Suppose there are several market baskets (or commodity bundles), say A, B, C, etc, each of which consists of some combination of goods. A consumer should have some preferences over these baskets. We make the following assumptions about preferences: (1) Completeness. For any two baskets, the consumer should be able to compare them. In other words, if A and B are any two baskets, the consumer should be able to say whether she likes A better, or B better, or she is indifferent between the two (she equally likes them). (2) Transitivity. If a consumer prefers A to B, and prefers B to C, then she should prefer A to C. (3) Nonsatiation. The consumer always prefers more to less of a commodity. Utility and Utility Functions The level of satisfaction a consumer receives from a certain choice is often referred to as the utility of that choice. When a consumer prefers A to B, we say she gets higher utility from A than from B. For each consumption bundle, we can assign a numerical value to it which preserves the preference ordering, and we call this correspondence between preference and real values the utility function. Utility function is defined such that for any baskets A and B: U(A) > U(B) iff the
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This note was uploaded on 03/31/2008 for the course ECON 3070 taught by Professor Loh,joyce during the Spring '07 term at Colorado.

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Ch.3 Notes - Intermediate microeconomics Professor Yongmin Chen Topic 2 Consumer Preferences and Utility The Nature of Consumer Preferences How

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