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Unformatted text preview: C H A P T E R 4 Tastes and Indifference Curves This chapter begins a 2-chapter treatment of tastes — or what we also call “pref- erences”. In the first of these chapters, we simply investigate the basic logic be- hind modeling tastes and the most fundamental assumptions we make. In the next chapter, we then turn to what specific types of tastes look like. Call me geek — but I think it’s pretty cool that we have found ways of systematically modeling something as abstract as people’s tastes! Chapter Highlights The main points of the chapter are: 1. Tastes have nothing to do with budgets — they are conceptually distinct. Budgets are all about what is feasible — and they arise objectively from “what we bring to the table” and the prices we face. Tastes are all about what we desire and have nothing to do with incomes, endowments or prices. 2. While our model of tastes respects the fact that there is a great diversity of tastes across people , we assume that some aspects of tastes are constant across individuals . The most basic of these are completeness and transitiv- ity, but the assumptions of monotonicity, convexity and continuity are also intuitively appealing in most circumstances. When we say tastes are “ratio- nal” we only mean that individuals with those tastes are capable of making decisions. 3. Maps of indifference curves are a way of describing tastes , with the usual shapes and orderings arising from our assumptions of monotonicity and con- vexity. For those covering part B, indifference curves are simply levels of util- ity functions — and these levels can no more cross than the elevations of mountains on geography maps can cross. 4. We typically assume that utility cannot be measured objectively — which is why the labels on indifference curves do not matter beyond indicating the ordering of what is better and what is worse. Tastes and Indifference Curves 40 5. The slope of an indifference curve — or the marginal rate of substitution — at a particular bundle tells us how an individual feels about different goods at the margin — i.e. how much the individual is willing to trade one good for another given that she currently has this particular bundle . Using the LiveGraphs For an overview of what is contained on the LiveGraphs site for each of the chapters (from Chapter 2 through 29) and how you might utilize this resource, see pages 2-3 of Chapter 1 of this Study Guide . To access the LiveGraphs for Chapter 4, click the Chapter 4 tab on the left side of the LiveGraphs web site. If you are not covering the mathematical B-part of the text Microeconomics: An Intuitive Approach with Calculus (or if you are using the non-mathematical text entitled Microeconomics: An Intuitive Approach ), you will miss some very helpful LiveGraphs unless you look for them. You can either find these under Animated Graphics if you are on the LiveGraphs site for the larger book with calculus — or you can find them under the Exploring Relationships...
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This note was uploaded on 11/17/2010 for the course ECON 100A taught by Professor Woroch during the Fall '08 term at Berkeley.
- Fall '08