1-16-09

# 1-16-09 - st derivative EXAMPLE Two different payment...

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Microeconomics – Class Notes – 1/16/09 CALCULUS Review We will be working on a lot of Calculus first. We use calculus to validate our hypotheses and/or theories – we can see the implications of the theory and if they are true or not. Utility (from money) – Variable “ x ” is the amount of money The function U is utility. U(x) The utility from money. As x increases, U increases. Curve 1 is what we expect: As X increases, U increases at a decreasing rate. The first dollar that we get is worth more to us than the billionth dollar. This is called the diminishing marginal utility for money.

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(The change in utility) / (change in X) = the marginal utility. How much extra utility do I receive from consuming an extra \$ The second derivate = derivative of the first derivative (1

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Unformatted text preview: st derivative). EXAMPLE: Two different payment schemes: Payment Scheme Pay Payment A \$100 Payment B 50% of \$200 50% of \$0 • We prefer payment scheme A instead of payment scheme B because B is riskier . The Expected value of A = \$100 The Expected value of B = 0.5*(200) + (0.5)*(0) = 100 Those who choose A also have a diminishing marginal utility. People who prefer A experience less utility with each additional dollar they earn. Addition Rule : • If f(x) = g(x) + h(x) SUMMARY • He just wants us to know how to take derivatives and then use those tools to analyze profits and functions. • This is the extent of the calculus we will be doing in this class. HOMEWORK: • Read the Calculus Appendix (CA) • Complete the rest of the worksheet...
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1-16-09 - st derivative EXAMPLE Two different payment...

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