Week 3A

Week 3A - COMM/FRE 295 Consumer Choice Readings Textbook...

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COMM/FRE 295 Sept 21, 2010 Consumer Choice

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Readings Textbook Sections 4.4 – 4.5 (pages 77- 104) Unfortunately there are no answers available for the questions at the back of the textbook Nevertheless, it is important to work through as many text questions as you can. See Prof Vercammen in office hours if you are unsure about whether your answer is correct.
Learning Outcomes Explore determinants of the size of price and income elasticity of demand Confirm that demand cannot be studied independently (i.e., the changes in price and quantity must conform to consumer’s budget constraint) Make a connection between how a consumer substitutes between goods and the slope of a demand schedule

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Preference maps & indifference curves Suppose you have a fixed budget for spending on travel to UBC and eating lunch at UBC Let D be the # of days you drive each month (rather than take the bus) and L be the # of days you buy lunch (rather than bringing it from home) A particular (D,L) combination is called a “bundle” An individual consumer can rank her bundles; e.g., I prefer (7,3) over (4,8) If we allow for fractional values for D and L, then there will exist (D,L) combinations for which consumer is indifferent
Notation and Properties A » B bundle A is preferred to bundle B A ~ B consumer is indifferent between A and B Properties Completeness: all bundles can be ranked Transitivity: if A » B and B » C then A » C More is Better: If bundle B has more D and at least as much L as bundle A, then B » A An indifference curve is a line which connects all bundles for which consumer is indifferent

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Preference map with one indifference curve Bundle A Bundle C Bundle B Bundle D A ~ B; C » A and C » B. We know this because C is preferred to any bundle on dark shaded section of curve (since “more is better”) and consumer is indifferent between points A, B and all bundles on dark shaded section L D For similar reasons A » D and B » D
Properties of Indifference Curves All bundles on preference map have one indifference curve running through it IC must slope down IC can never cross Bundles on an IC further from the origin are preferred to IC closer to the origin These properties can easily be established on a diagram using the “completeness”, “transitivity” and “more is better” properties (please see the text)

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This note was uploaded on 01/03/2011 for the course COMM 290 taught by Professor Brian during the Winter '09 term at UBC.

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Week 3A - COMM/FRE 295 Consumer Choice Readings Textbook...

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