Lec08 - Model of Consumer Choice u Utility numerical...

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1 Model of Consumer Choice u Utility numerical measure of satisfaction; bigger is better u Marginal Utility additional utility from additional unit of good u Law of Diminishing Marginal Utility marginal utility diminishes as more of a good is consumed u What if consumer chooses another affordable bundle? Utility Maximization Willingness to Pay Bagel OJ 1st 2nd 3rd 4th 5th income = 100 Janets price Bagel = 20 Janets price OJ 20 Janets XY M U MU = PP entire income spent u Conditions for utility maximization u OJ Utility u Bagel Utility u the consumer is worse off Bagels OJ u consumer spends entire income Consumer Choice u 2 goods - X and Y u consumer chooses the best (highest utility) bundle affordable u two parts of the model: tastes and budget set u compare to X X MU P Y Y P M U MU > If , then buy more X. YX M U MU > If , then buy more Y. Condition for utility maximization M U =
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2 Consumer Choice u Diamond-Water Paradox u prices are determined by demand and supply
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Lec08 - Model of Consumer Choice u Utility numerical...

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