Lecture Notes 5

# Lecture Notes 5 - Consumer Behavior X A 1 B 2 C 3 D 4 Y 20...

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07/02/11 Consumer Behavior: X Y A 1 20 B 2 19 C 3 16 D 4 11 4 choices of good x that can be consumed, with options of good y – combinations, where utility is constant The consumer is indifferent to which combination they receive The graphing of this information will establish an indifference curve, where any combinations along that indifference curve will bring the consumer the same amount of utility. Continuous utility function There are several possible indifference curves, because there are differing levels of utility a consumer can reach Assume transitive preferences Qualities of an indifference curve: o Downward sloping – there is a tradeoff. An upward facing utility slope cannot exists as long as goods are ‘good’ and non-satiation. o Non-linear, convex origin: slope is changing. The slope is the marginal rate of substitution – substituting x for y. How much Y are we willing to give up to increase consumption of good X by one unit? o Diminishing marginal utility: at the margins, a consumer is either willing to give up a lot of Y for a small increase in X, or not willing to substitute a lot of Y for a large increase in X. Left margin, high marginal utility for X, steep slope. Right margin, high amounts of X, low Y, small slope – relatively flat. o The change in total utility (in consumption of two goods) = (MU(x)*change in x) + (MU(y)*change in y) o Along a given indifference curve, change in total utility is zero o Slope of the indifference curve is the ratio of the marginal utilities o Convex origin: the law of diminishing marginal utility – moving down an indifference curve, marginal utility changes o Indifference curves are ‘parallel’ – they cannot intersect

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## This note was uploaded on 09/08/2011 for the course ECON 101 taught by Professor Gulati during the Spring '11 term at Columbia.

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Lecture Notes 5 - Consumer Behavior X A 1 B 2 C 3 D 4 Y 20...

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