Preferences and Utility

Preferences and Utility - 1. Preferences and Utility...

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1. Preferences and Utility (Chapter 3) a. Assumptions: preferences are complete, transitive, and more is better. b. Utility function: satisfaction from a bundle of goods and services c. Marginal utility: how total utility changes as consumption of a good increases. MU x =dU/dx. i. Diminishing marginal utility: after some consumption level, marginal utility from that good falls d. Indifference curves: connects bundles of equal utility e. Marginal rate of substitution: how much y the consumer will give up for one more x i. MRS= –(slope of indifference curve) ii. MRS=MUx/MUy f. Special utility functions: i. Perfect substitutes: U=aX+bY, where a and b are constants ii. Perfect complements: always consumes in fixed proportion, e.g. U=min(2x, y) iii. Cobb-Douglas: U=aX b Y c . 2. Consumer Choice (Chapter 4) a. Budget constraint: PxX+PyY=I. b. Budget line: connects baskets of goods that consumer can buy when spending all income i. Slope=-Px/Py ii. Increasing income shifts budget line out iii. Increasing prices rotates budget line
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Preferences and Utility - 1. Preferences and Utility...

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