penn101_09s2 - Budget Constraint Prefereces Utility Choice...

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Budget Constraint Prefereces Utility Choice Econ 101: Intermediate Microeconomics Consumer Theory I: How Does a Consumer Choose? Part 2 Jing Li Department of Economics University of Pennsylvania January 27, 2009 Jing Li Intermediate Microeconomics
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Budget Constraint Prefereces Utility Choice Utility Representation Some Important Classes of Utility Functions Marginal Utility and Marginal Rate of Substitution From preferences to utilities translates English into math, but is still not convenient enough (no algebra). orders commodity bundles, orders real numbers and we know how to compute reals. Idea: let’s further translate into , by labeling more preferred bundles with bigger numbers. Looking for the best bundle(s) = looking for the biggest number(s) Jing Li Intermediate Microeconomics
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Budget Constraint Prefereces Utility Choice Utility Representation Some Important Classes of Utility Functions Marginal Utility and Marginal Rate of Substitution From preferences to utilities translates English into math, but is still not convenient enough (no algebra). orders commodity bundles, orders real numbers and we know how to compute reals. Idea: let’s further translate into , by labeling more preferred bundles with bigger numbers. Looking for the best bundle(s) = looking for the biggest number(s) Jing Li Intermediate Microeconomics
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Budget Constraint Prefereces Utility Choice Utility Representation Some Important Classes of Utility Functions Marginal Utility and Marginal Rate of Substitution From preferences to utilities translates English into math, but is still not convenient enough (no algebra). orders commodity bundles, orders real numbers and we know how to compute reals. Idea: let’s further translate into , by labeling more preferred bundles with bigger numbers. Looking for the best bundle(s) = looking for the biggest number(s) Jing Li Intermediate Microeconomics
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Budget Constraint Prefereces Utility Choice Utility Representation Some Important Classes of Utility Functions Marginal Utility and Marginal Rate of Substitution From preferences to utilities translates English into math, but is still not convenient enough (no algebra). orders commodity bundles, orders real numbers and we know how to compute reals. Idea: let’s further translate into , by labeling more preferred bundles with bigger numbers. Looking for the best bundle(s) = looking for the biggest number(s) Jing Li Intermediate Microeconomics
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Budget Constraint Prefereces Utility Choice Utility Representation Some Important Classes of Utility Functions Marginal Utility and Marginal Rate of Substitution Utility representation Definition Suppose is a preference relation on the commodity space R 2 + . A function u : R 2 + R is a utility function for if it satisfies: x y u ( x ) u ( y ) .
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