kf005a - IndifferenceCurves Ka-fu Wong Unive rsity of Hong...

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1 Ka-fu Wong University of Hong Kong Indifference Curves
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2 Example: To encourage education, a government is considering  three different options: A lump-sum cash to kids of school age. A matching subsidy to each dollar the kids spend on  schooling. Provide education for free. Which is better?
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3 Three Steps Involved In The Study Of  Consumer Behavior. 1) We will study  consumer preferences . To describe how and why people prefer one good  to another. 2) Then we will turn to  budget constraints . People have limited incomes. 3) Finally, we will combine consumer preferences and  budget constraints to determine  consumer choices . What combination of goods will consumers buy to  maximize their satisfaction?
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4 Market basket defined market basket  is a collection of one or more  commodities. One market basket may be preferred over another  market basket containing a different combination of  goods.
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5 Three Basic Assumptions of Consumer  Preferences Preferences are  complete . Give me any two baskets of goods (A and B), I will be able  to tell you on of the followings: I prefer A to B I prefer B to A I am indifferent between A and B Preferences are  transitive . If I prefer A to B and B to C, I must also prefer A to C. Non-satiation : Consumers always prefer more of any good to  less. Indifference curves represent all combinations of market baskets that provide the same level of satisfaction to a person.
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6 Preferences over market basket A 20 30 B 10 50 D 40 20 E 30 40 G 10 20 H 10 40 Market Basket Units of Food Units of Clothing E is preferred to Similarly, A, E, B, H, D are all preferred to G Much easier to see in a graph. Observations based on more good is preferred to less G A H
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7 Preferences over market basket Easier to see in a graph The consumer prefers A to all combinations in the blue box, while all those in the pink box are preferred to A. Food (units per week) 10 20 30 40 10 20 30 40 Clothing (units per week) 50 G A E H B D
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8 Preferences over market basket   Easier to see in a graph U 1 For example: Combination yield the same satisfaction E is preferred to U 1 U 1 is preferred to Food (units per week) 10 20 30 40 10 20 30 40 Clothing (units per week) 50 G D A E H B
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Preferences over market basket U 1 Food (units per week) 10 20 30 40 10 20 30 40 Clothing (units per week) 50 G D A E H B Any market basket lying above and to the right of an indifference curve is preferred to any market basket that lies on the indifference curve. Indifference curves
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kf005a - IndifferenceCurves Ka-fu Wong Unive rsity of Hong...

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