Chapter 3 part 2 - AGEC 105 Chapter 3(PART 2 Theory of...

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Chapter 3 (PART 2) Theory of Consumer Behavior AGEC 105
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2 Topics of Discussion THE BUDGET CONTSTRAINT UTILITY THEORY Total Utility Marginal Utility Law of Diminishing Marginal Utility INDIFFERENCE CURVE Concept of Isoutility Marginal Rate of Substitution
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3 Indifference Curve Approach Indifference Curve Approach Cardinal measurement of utility is both unreasonable and unnecessary. We can instead use an ordinal measurement of utility, which means all we need to know is that one bundle is preferred over another. Modern consumption theory is based upon the notion of isoutility curves , where “iso” is the Greek for “equal”. The consumer is assumed to be indifferent among different combinations of goods along a isoutility curve.
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An Indifference/Isoutility Curve Number of Concerts per Month Number of Movies per Month 6 3 4 11 20 1 2 3 4 5 If Max gets another concert . . . G H J K L +1 +1 +1 +1 -9 -5 -2 -1 He could give up 9 movies and be just as satisfied.
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