ECON 1 Lecture Notes 1020

ECON 1 Lecture Notes 1020 - # pizzas # coke 4 2 3 1 X1 = #...

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ECON 1 Lecture Notes 10/20/10 Assumption: no utility from the gift-selection process Non-cash gifts are not as good as cash gifts $50 cash > $ 50 gift SeaWorl d Visits 0 1 2 3 4 5 Total Utility 0 50 75 90 100 100 6 / 95 Marginal Utility: 0 50 = 50 50 75 = 25 75 90 = 15 90 100 = 10 100 100 = 0 100 95 = -5 - marginal utility: additional utility you get from consuming an additional unit of a good - law of diminishing marginal utility: marginal utility ill start decreasing as consumption increases beyond some point - marginal utility and total utility o MU > 0 TU will increase with consumption o MU < 0 TU will decrease with consumption The Budget Constraint - a budget constraint shows the limits of a household’s consumption o a boundary b/w what you can afford and what you can’t afford - example: suppose you have $10 to spend on party food o price of pizza = $2/slice, price of coke = $1/can o what are all the possible combos of pizza/coke you can buy?
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Unformatted text preview: # pizzas # coke 4 2 3 1 X1 = # pizza X2 = # coke $2 x X1 + $1 x X2 &lt;/ $10 BC Determine Demand-people need to decide the quantity of each good to purchase given the current income and prices-goal: maximize utility within BC How to Choose Between Two Goods-if there is no budget constraint, how many slices of pizza and how many cans of coke should you order? Rational Spending Rule-spending should be allocated across goods so that the MU per dollar is the same for each good CB principle: select all where MB &gt; MC up to where MB = MC, but never choose where MB &lt; MC Utility Maximization: MB of product X in the MU per dollar spent on product X MB of x = MU of x / P of x MC of product x in the MU you are not receiving from a dollars worth of your next best alternative (product y) MC of x = MU of y / P of y...
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ECON 1 Lecture Notes 1020 - # pizzas # coke 4 2 3 1 X1 = #...

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