2010_lecture_4_ho

2010_lecture_4_ho - Economics 101Lecture 4 The Basic Model...

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Unformatted text preview: Economics 101Lecture 4 The Basic Model of Consumer Choice II George J. Mailath January 25, 2011 In our last episode 1 We introduced preferences over consumption bundles x X , where X is the consumption set. Typically X = R n + . 2 A utility function U : X R represents if x x U ( x ) U ( x ) . 3 Monotone preferences are characterized by their indifference curves (where an indifference curve is a locus of bundles over which the consumer is indifferent). For a fixed bundle x , the indifference curve through x is the set ( x ) { x X : x x } . In our last episode, cont. Preferences are convex if the better than sets are convex, which requires diminishing MRS (i.e., the indifference curves are convex). The MRS ( marginal rate of substitution ) of good i in terms of good j is the (negative of the) slope of the indifference curve (in the ij direction): MRS ij = U i U j = U / x i U / x j . Example: Cobb Douglas U ( x 1 , x 2 ) = x 1 x 2 , for some , > 0. Example: perfect complements U ( x 1 , x 2 ) = min { x 1 , x 2 } , for some , > 0. Example: Perfect substitutes U ( x 1 , x 2 ) = x 1 + x 2 , for some , > 0. Utility Maximization...
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2010_lecture_4_ho - Economics 101Lecture 4 The Basic Model...

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