PAM_2000_Fall_2008_Chapter_4 - Title: Money Talks Artist:...

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1 • Title: Money Talks • Artist: AC/DC • Economic concepts: exchange (love for money) • Representative lyrics: The furs, the diamonds, the painting on the wall Come on, come on, love me for the money Come on, come on, listen to the money talk PAM 200: Intermediate Microeconomics Prof. John Cawley Chapter 4: Consumer Choice
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2 Where We Are Consumer Theory Individual Demand Market Demand Theory of Production Costs of Production Perfect Competition Imperfect Competition: Monopoly Monopolistic Competition Oligopoly Prices General Equilibrium Market Imperfections Factor Markets Strategy Game Theory Chapter Outline Three steps involved in studying consumer behavior: 1. Study consumer preferences (indifference curves) 2. Study budget constraints 3. Combine 1&2: what combinations of goods are chosen in order to maximize happiness given budget constraints?
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3 Consumer Preferences Three Basic Assumptions: 1. Preferences are complete Never unable to compare 2. Preferences are transitive If A>B, and B>C, then A>C 3. Consumers prefer more to less of each good Bundles of Pizzas and Burritos B , Burritos per semester 30 25 15 Z , Pizzas per semester 25 20 15 10 0 d a b e c f Inferior to bundle e Preferred to bundle e
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4 Indifference Curves • Link all bundles of goods that provide the same level of utility • One is indifferent between the bundles on the curve – all equally satisfying Bundles of Pizzas and Burritos: Indifference Curve B , Burritos per semester 30 25 15 Z , Pizzas per semester 25 20 15 10 0 d a b U e c f Direction of Increasing Utility
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5 Impossible Indifference Curves: Crossing B , Burritos per semester Z , Pizzas per semester U 1 U 0 a b e Impossible Indifference Curves: Upward Sloping B , Burritos per semester Z , Pizzas per semester U a b
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6 Impossible Indifference Curves: Thick B , Burritos per semester a b Z , Pizzas per semester U Marginal Rate of Substitution • Measures the maximum amount of a good a person is willing to give up in order to receive a unit of another good • Graphically, it is the slope of the indifference curve: the gain on one dimension needed to compensate for a drop on another dimension • Will vary along the indifference curve Good Y Good X MRS Δ = Δ
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7 Slope of the Indifference Curve: Marginal Rate of Substitution B , Burritos per semester 5 3 8 1 –1 1 1 2 0 –2 3 3456 Z , Pizzas per semester a b c d U
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This note was uploaded on 05/30/2009 for the course PAM 2000 taught by Professor Evans,t. during the Spring '07 term at Cornell University (Engineering School).

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PAM_2000_Fall_2008_Chapter_4 - Title: Money Talks Artist:...

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