ch03 ppt notes

# ch03 ppt notes - Chapter Three Consumer Preferences and the...

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1 Consumer Preferences and the Concept of Utility Chapter Three Chapter Three

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2 Chapter Three Overview 1. Motivation 1. Consumer Preferences and the Concept of Utility 1. Indifference Curves 1. The Marginal Rate of Substitution 1. The Utility Function Marginal Utility and Diminishing Marginal Utility 1. Some Special Functional Forms Marginal Utility and the Marginal Rate of Substitution Chapter Three
3 Motivation • Equilibrium/comparative statics studies may predict the direction of change but: Elasticity good descriptive measure of demand and supply but it not predictive • Back of the envelope techniques miss nonlinearities Over what price range? How much? Chapter Three

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4 Consumer Preferences Consumer Preferences tell us how the consumer would rank (that is, compare the desirability of) any two combinations or allotments of goods, assuming these allotments were available to the consumer at no cost. These allotments of goods are referred to as baskets or bundles . These baskets are assumed to be available for consumption at a particular time, place and under particular physical circumstances. Chapter Three
5 Consumer Preferences Preferences are complete if the consumer can rank any two baskets of goods (A preferred to B; B preferred to A; or indifferent between A and B) Preferences are transitive if a consumer who prefers basket A to basket B, and basket B to basket C also prefers basket A to basket C A    B; B    C    = > A C Chapter Three

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6 Consumer Preferences Preferences are monotonic if a basket with more of at least one good and no less of any good is preferred to the original basket. Chapter Three
7 Intransitivity and Age Source: Sixth Edition. Age Number of Subjects Intransitive 4 39 83 5 33 82 6 23 82 7 35 78 8 40 68 9 52 57 10 45 52 11 65 37 12 81 23 13 81 41 Adults 99 13 Chapter Three

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8 Indifference Curves An Indifference Curve or Indifference Set: is the set of all baskets for which the consumer is indifferent An Indifference Map : Illustrates a set of indifference curves for a consumer Averages preferred to extremes => indifference curves are bowed toward the origin (convex to the origin). Chapter Three
9 Indifference Curves 1). Monotonicity => indifference curves have negative slope and indifference curves are not “thick” 2). Transitivity => indifference curves do not cross 3). Completeness => each basket lies on only one indifference curve Chapter Three

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10 Indifference Curves Source: See Hirshleifer, Jack and D. Hirshleifer, Price
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ch03 ppt notes - Chapter Three Consumer Preferences and the...

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