ajaz_204_2009_lecture_4

ajaz_204_2009_lecture_4 - University of Toronto Department...

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University of Toronto Department of Economics ECO 204 2009 2010 Sayed Ajaz Hussain Lecture 4 1 Ajaz Hussain. Department of Economics. University of Toronto (St. George)
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Today ± From felicity plots to utility functions ± Some Interesting Preferences and Utility Functions ² Attitudes towards risk ² Imperfect Substitutes ² Perfect Substitutes ² Complements ² Quasi Linear ² CES ± Monotonic Transformationsh ± Marginal Rate of Substitution (MRS) ± Convex Preferences Ajaz Hussain. Department of Economics. University of Toronto (St. George) 2
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The Importance of Indifference Curves So far, indifference curves can tell us if consumer has: Rational Preferences ‐‐ how? Monotonic Preferences ‐‐ how? Today indifference curves will tell us: How consumer perceives commodities ‐‐ indifference curve slope How to model a consumer’s preferences Whether consumer likes variety ‐‐ convex preferences Ajaz Hussain. Department of Economics. University of Toronto (St. George) 3
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Last Time: LV Loving Consumer Consumer with monotonic preferences for LV bags Ajaz Hussain. Department of Economics. University of Toronto (St. George) 4 LV Bags Felicity from LV Bags 0 1 2 3 4 Ordinal Scale Felicity Plot 1 Felicity Plot 2 Felicity Plot 3 Each felicity plot represents the LV loving consumer’s preferences
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Some Utility Functions for LV Loving Consumer Ajaz Hussain. Department of Economics. University of Toronto (St. George) 5 LV Bags U = xU = 4 + = 20 + 2x U = x 3 00 4 2 0 0 11 5 2 2 1 22 6 2 4 8 33 7 2 62 7 44 8 2 86 4
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Positive Monotonic Transformation A positive monotonic transformation on a utility function preserves the order of felicity rankings; it is itself a utility function Examples: Multiplying utility function by a positive number Adding a positive number to utility function Raising the utility function to an odd power Taking the log of utility function Ajaz Hussain. Department of Economics.
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ajaz_204_2009_lecture_4 - University of Toronto Department...

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