section 3 - Aniko Oery University of California, Berkeley...

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Aniko Oery University of California, Berkeley Section 3: Consumer preferences and utility functions Econ 100A, MICRO-ECONOMIC ANALYSIS, Spring 2010 Last time we have discussed how equilibria arise in markets given demand and supply functions. Our next goal is to understand how the demand side of the market works. Therefore, we will start with the analysis of preferences of consumers. Given certain assumptions, preferences can be represented by a utility function. Next time, we will examine the behavior of consumers under risk and next week we will incorporate the budget constraint that a consumer faces. 1 Preferences For simplicity we assume that the decision maker only cares about two types of goods x and y. E.g., you can think of good x being some good we are interested in and good y being the value of the sum of all other goods. Preferences are then defined on the set of baskets ( Q x , Q y ), where Q x , Q y are real numbers representing the quantity of good x and y , respectively. We write (3 , 7) ± (8 , 1) if the decision maker prefers the basket (3 , 7) to (8 , 1), i.e. he likes 3 units of good x and 7 units of good y more than 8 units of good x and 1 unit of good y . We often denote such bundles or baskets by capital letters A,B,C, i.e. for example A = (3 , 7), B = (8 , 1) and A ± B . Moreover, you know from lecture that preferences must satisfy Completeness, Transitivity and Monotonicity (more is better). We can plot these bundles in the (
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This note was uploaded on 03/18/2010 for the course ECON 100A taught by Professor Woroch during the Spring '08 term at University of California, Berkeley.

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section 3 - Aniko Oery University of California, Berkeley...

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