CHAPTER 3A UTILITY FUNCTION

CHAPTER 3A UTILITY FUNCTION - INDIFFERENCE CURVE IS THE SET...

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For Personal Use Only. Not For Circulation. © Charles R. Hulten 2010 ECON 306 CLASS HANDOUT THE UTILITY FUNCTION ASSUMPTIONS ABOUT CONSUMER CHOICE NEEDED TO DERIVE THE DEMAND CURVE COMPLETENESS: For all alternatives A and B, either A > B, or B > A, or A ~ B TRANSITIVITY If A > B, and B > C, then A > C If A ~ B, and B ~ C, then A ~ C NON-SATIATION: There is always a B such that B >A
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For Personal Use Only. Not For Circulation. © Charles R. Hulten 2010 X = quantity of good X consumed Y = quantity of good Y consumed M Good X Good Y A 0 M B M Z C Good X Good Y A 8 8
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For Personal Use Only. Not For Circulation. © Charles R. Hulten 2010 M Good X Good Y A 0 8 8 M Good X Good Y A 0 8 8 10 20 30 50 40
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For Personal Use Only. Not For Circulation. © Charles R. Hulten 2010
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Unformatted text preview: INDIFFERENCE CURVE IS THE SET COMBINATIONS OF (X,Y) WHICH HAVE THE SAME UTILITY, e.g. U = U(X,Y) = U(8,8) = 30 BECAUSE UTILITY IS FIXED, A MOVE FROM ONE POINT ON THE I-CURVE MUST INVOLVE NO NET CHANGE IN UTILITY THEREFORE [ U/ X] dX + [ U/ Y] dY = 0 U/ X IS THE MARGINAL UTILITY OF X MRS = - dY/ dX = [ U/ X] / [ U/ Y] THE MRS IS THE RATIO OF THE MARGINAL UTILITY OF X AND Y X Y A 8 8-3 +1 7 30 B* 11 M M C For Personal Use Only. Not For Circulation. Charles R. Hulten 2010 X Y A 8 9-3-2 7 30 B* 11 M M C +1 +1 6 8 M...
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This note was uploaded on 09/07/2011 for the course ECON 306 taught by Professor Cramton during the Spring '06 term at Maryland.

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CHAPTER 3A UTILITY FUNCTION - INDIFFERENCE CURVE IS THE SET...

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