Theme2_choix_A08AN - Consumer choice 2 The MRS slope of an...

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Consumer choice
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2 We define the marginal rate of substitution of good X for good Y as follows: What does it mean in terms of trade? Ex: MRS XY = 2 ? The MRS: slope of an IC Good X Good Y Δx Δy MRS XY = -Δy/Δx = |slope of IC|
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3 The MRS depends on current consumption Food Clothing 2 3 4 5 1 2 4 6 8 10 12 14 16 A B D E G -6 1 1 1 1 -4 -2 -1 MRS = 6 MRS = 2 MRS XY = - Y/ X
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4 Utility : a numerical representation of preferences If U(A)>U(B), then A is preferred to B. The ICs are the level lines of the utility function, U. Good X Good Y 1 1 2 2 U = 1 U = 4 Ex: U(x,y) = xy
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Consider the following bundles: A=(4,1), B=(1,2) et C=(0,5) Which one yields a higher utility ? Show graphically. *Examples - If U(x,y) = xy; - If U(x,y) = x + 4y;
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6 Marginal Utility: MU The marginal utility of good X is the extra utility derived from the cosumption of an additional unit of X Ex: With U(x,y) = x + 4y, at A = (4,1), MU X =U’ X = ____ ; U(4+1,1) – U(4,1) = ____. MU Y =U’ Y = ____ ; U(4,1+1) – U(4,1) = ____. MU X = U’ X
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Relation between MU and MRS U 2 U 1 X A C B Y Going from A to C: - From A to B: Loss = - y MU y x Y X XY MU MU MRS =
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