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Topic4_intmicro_utility_part_1_TW

# Topic4_intmicro_utility_part_1_TW - TOPIC 4 UTILITY...

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Dr. Fidel Gonzalez (SHSU) TOPIC 4: UTILITY INTERMEDIATE MICROECONOMICS Spring 2011 Dr. Fidel Gonzalez Department of Economics and Intl. Business Sam Houston State University

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The following diagram will help you see what we are doing. The consumer is going to buy the best combinations of goods that she can afford. BEST AFFORD BUDGET PREFERENCES Remember two ingredients: preferences and budget to explain the consumer’s choices. We have covered preferences and budget. We know covered utility which will help us explain better preferences. Covered before Now we will cover UTILITY UTILITY
UTILITY Remember that we talked about preferences to know what “best” means for the consumer. A bundle is considered the best if it makes the consumer the happiest. Utility is going to help us summarize the preferences of the consumer. UTLITY HAPPINESS From now on think about the utility as a proxy of happiness. Utility is going to tell us how happy a bundle of x1 and x2 makes the consumer. Utility is helpful because is going to help us determine which bundles are preferred. For example, consider the following bundles and their respective utility (denoted by “U”) : Utility: a numerical value that reflects the relative ranking of different bundles. A=(10,54) U =6 B=(23,12) U =8 C=(16,30) U =5 Bundle A gives the consumer a utility of 6, bundle B a utility of 8 and C a utility of 5. The utility number has no units. So the 5, 6 and 8 are just that numbers THEY ARE NOT money or anything else.

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Utility is useful because now we can rank the three bundles. Given the information then: A is preferred to C because it gives the consumer more happiness since it has a higher utility level. B is preferred to A because it gives the consumer more happiness since it has a higher utility level. B is also preferred over C because utility is higher. Because utility is a number that is only useful when we compare and rank bundles. We say that utility is an ordinal number. You probably remember hearing about ordinal numbers from elementary school.
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