ECN_203__2__Modeling_Individual_Choice-1

# ECN_203__2__Modeling_Individual_Choice-1 - Chapter 2...

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Chapter 2: Modeling Individual Choice Purpose : Develop a model to describe how individuals make choices (allocate scarce resources). Start with a simple model, then adapt to allow for more complex decisions. Assumption that always holds : Individuals are rational always choose what maximizes happiness.

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Key Concepts of the Model Total Utility (TU) -- satisfaction/ happiness Consumption -- act of deriving utility. Marginal Utility (MU) -- the change in TU resulting from a change in the quantity (Q) consumed. MU = ΔTU/ΔQ. Diminishing MU -- an assumption that utility diminishes with each successive unit of a good or service.
Decision Rule With One Good (No Scarcity) Consume up to the point before total utility falls (beyond this point will take away from total utility). Decision rule : MU=0 (make decisions at the margin). Referred to as satiation or bliss point.

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Decision Rule with n Choices (No Scarcity) If money is not scarce, consume until
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ECN_203__2__Modeling_Individual_Choice-1 - Chapter 2...

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