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Indifference_Curves

Indifference_Curves - Indifference Curves APPEN D I X t o...

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Indifference Curves APPENDI X to Lecture 3
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Slide 2 Consumer Behavior Three steps involved in the study of consumer behavior 1) Study consumer preferences To describe how and why people prefer one good to another. 2) Turn to budget constraint People have limited incomes. 3) Determine consumer choices What combination of goods will consumers buy to maximize their satisfaction?
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Slide 3 Consumer Preferences A bundle of goods or market basket is a collection of one or more commodities. A market basket may be preferred over another market basket containing a different combination of goods.
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Slide 4 Three Basic Assumptions of Consumer Preferences Preferences are complete . Give me any two baskets of goods (A and B), I will be able to tell you on of the followings: I prefer A to B I prefer B to A I am indifferent between A and B.
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Slide 5 Three Basic Assumptions of Consumer Preferences Preferences are transitive . If I prefer A to B and B to C, I must also prefer A to C. Non-satiation : Consumers always prefer more of any good to less.
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Slide 6 The consumer prefers A to all combinations in the blue box, while all those in the pink box are preferred to A. Preferences over Market Basket Food (units per week) 10 20 30 40 10 20 30 40 Clothing (units per week) 50 G A E H B D
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Slide 7 Combination B,A, & D yield the same satisfaction E is preferred to U 1 U 1 is preferred to H & G U 1 Indifference Curve Food (units per week) 10 20 30 40 10 20 30 40 Clothing (units per week) 50 G D A E H B Indifference curves represent all combinations of bundles that provide the same level of satisfaction to a person.
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Slide 8 Indifference Curve U 1 Food (units per week) 10 20 30 40 10 20 30 40 Clothing (units per week) 50 G D A E H B Any market basket lying above and to the right of an indifference curve is preferred to any market basket that lies on the indifference curve. Indifference curves slope downward to the right. If it sloped upward it would violate the assumption that more of any commodity is preferred to less.
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Slide 9 U 2 U 3 Indifference Map Food (units per week) Clothing (units per week) U 1 A B D Market basket A is preferred to B.
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