chp4 - ECON 300B Lei Intermediate Microeconomics Winter...

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Unformatted text preview: ECON 300B Lei Intermediate Microeconomics Winter 2011 1 Chapter 4 Chapter 4 Chapter 4 Chapter 4 Consumer Choice Consumer Choice Consumer Choice Consumer Choice Based on observation of individuals behavior, the model of consumer behavior model of consumer behavior model of consumer behavior model of consumer behavior incorporates: i. _______________________________ determine amount of pleasure a consumer gains from consumption of goods. ii. A consumer faces __________________________________________ to his/her choices. iii. A consumer chooses the ________________________________________________ that ______________________________________ his/her pleasure subject to the constraints. Properties of consumer preferences Properties of consumer preferences Properties of consumer preferences Properties of consumer preferences i. completeness: i. completeness: i. completeness: i. completeness: ~ When comparing two consumption bundles, an individual knows for sure he/she prefers which bundle over the other or he/she is indifferent between the bundles. ii. transitivity: ii. transitivity: ii. transitivity: ii. transitivity: ~ A consumers preferences have to be consistent. For example, if a consumer prefers a to b and prefers b to c, then he/she must prefer a to c. iii. iii. iii. iii. more is better: more is better: more is better: more is better: ~ One prefers more of a good to less. In other words, ___________________________ is assumed. Example Example Example Example Assume there are two goods apples (A) and oranges (O). From the graph above (see also Figure 4.1 (a)), we know, for example: 1. Point e represents the consumption bundle that contains ______________________ . 2. Bundle f is _______________________ bundle e because _________________________ . 3. Bundle e is _______________________ bundle d because _________________________ . g G g,G 5,5 3,3 .5g, 32 9 G 3.5, 32 7 ECON 300B Lei Intermediate Microeconomics Winter 2011 2 4. Using 2. and 3. and by transitivity, bundle f must be __________________________ bundle d. 5. Bundles b, c and e cannot be compared from the graph, but the consumer his/herself should be able to compare them because of ___________________________ of consumer preferences. Utility Utility Utility Utility ~ an ordinal ordinal ordinal ordinal measure of pleasure that a consumer gains from consuming a bundle of goods Example Example Example Example In the example of apples and oranges, knowing that the consumer prefers bundle f to bundle e, we know bundle f gives the consumer more pleasure/utility, but we do not know exactly how much happier he/she is. For example, all of the following tell us the same story: 1. utility of bundle e = 1 and utility of bundle f = 1000 2. utility of bundle e = 4 and utility of bundle f = 5 3. utility of bundle e = 0.1 and utility of bundle f = 0.2 Utility function Utility function Utility function Utility function ~ a function that assigns a utility level to a given bundle of goods...
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chp4 - ECON 300B Lei Intermediate Microeconomics Winter...

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