Consumer Theory 2

Consumer Theory 2 - Economics 21 Intermediate...

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Economics 21 Intermediate Microeconomics Topic 2: Consumer Theory (ii)
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I. Utility Maximisation Budget line shows the consumer’s affordable bundles given the market environment. The indifference map shows the consumer’s desired bundles To complete the model we assume rational maximisation - i.e. the consumer chooses the affordable bundle that maximises his utility.
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I. Utility Maximisation This is a non-trivial point. We are implicitly assuming that the consumer only derives utility from the consumption of x and y . Moreover, rational maximisation implies consumer processes huge amount of information before choosing his most preferred bundle In reality, perhaps we ‘satisfice’
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I. Utility Maximisation The optimal choice bundle will be that point at which an indifference curve just touches the budget line That is, where an indifference curve is tangent to the budget line In words, where the consumer’s marginal rate of substitution ( MRS ) and economic rate of substitution ( ERS ) are in accord
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I. Utility Maximisation
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Consumer Theory 2 - Economics 21 Intermediate...

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