L10 - Economics 101:Principles of Microeconomics Professor...

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1 Economics 101:Principles of  Microeconomics Professor Jo Hertel Lecture 10: Consumer choice Budget lines The optimal consumption decision Optimal consumption when income or prices change
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2 Consumer choice In this section, we look at optimal consumption decisions in a larger context: deciding how to spend your income on all available goods. connect the isolated buying decisions we looked at before Choices depend on preferences, prices and income How do we model preferences? A thought experiment
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3 Good X Good Y Modeling preferences: indifference  curves Preferences about any two goods are expressed with a system of indifference curves such that: the consumer is indifferent between any 2 points on the same IDC He prefers bundles on a higher IDC q’ Y q Y q’ X q X the consumer is indifferent between these two bundles An indifference curve is a line containing all bundles the consumer likes equally Definition Definition Definition Definition Definition Definition Definition
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4 HEPF  – 4 facts about IDCs to remember Indifference curves (are): H igher is better Everywhere – every bundle has an IDC through it Parallel – a consumer’s IDCs never, ever cross Fixed – a consumer’s IDCs don’t change Good X Good Y q’ X q X
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5 Modeling preferences: indifference curves We assume: more of a good is better Then: IDCs are downward sloping We express ‘we like these bundles better’ with an arbitrary scale we call utility: “Bundle A has higher utility than B” = “I like A better than B” Good X Good Y U 1 = 100 2 = 400 3 = 700 4 = 800 We like a bundle better that has a higher utility level and vice versa – all bundles on 1 IDC have same utility!
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6 Indifference curves of regular goods
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This note was uploaded on 04/01/2008 for the course ECON 101 taught by Professor Hansen during the Fall '07 term at University of Wisconsin.

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L10 - Economics 101:Principles of Microeconomics Professor...

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