ch03 - Chapter 3 Consumer Preferences and the Concept of...

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1 Consumer Preferences and the Concept of Utility Chapter 3
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2 Chapter Three Overview 1. Motivation 2. Consumer Preferences and the Concept of Utility 3. The Utility Function Marginal Utility and Diminishing Marginal Utility 4. Indifference Curves 5. The Marginal Rate of Substitution 1. Some Special Functional Forms Chapter Three
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3 Motivation • Why study consumer choice? Study of how consumers with limited resources choose goods and services Helps derive the demand curve for any good or service Businesses care about consumer demand curves Government can use this to determine how to help and whom to help buy certain goods and services Chapter Three
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4 Consumer Preferences Consumer Preferences tell us how the consumer would rank (that is, compare the desirability of) any two combinations or allotments of goods, assuming these allotments were available to the consumer at no cost. These allotments of goods are referred to as baskets or bundles . These baskets are assumed to be available for consumption at a particular time, place and under particular physical circumstances. Chapter Three
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5 Consumer Preferences Preferences are complete if the consumer can rank any two baskets of goods (A preferred to B; B preferred to A; or indifferent between A and B) Preferences are transitive if a consumer who prefers basket A to basket B, and basket B to basket C also prefers basket A to basket C A    B; B    C    == > A C Chapter Three
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6 Consumer Preferences Preferences are monotonic if a basket with more of at least one good and no less of any good is preferred to the original basket. Chapter Three
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7 Types of Ranking Students take an exam. After the exam, the students are ranked according to their performance. An ordinal ranking lists the students in order of their performance (i.e., Harry did best, Joe did second best, Betty did third best, and so on). A cardinal ranking gives the mark of the exam, based on an absolute marking standard (i.e., Harry got 80, Joe got 75, Betty got 74 and so on). Alternatively, if the exam were graded on a curve, the marks would be an ordinal ranking.
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This note was uploaded on 09/15/2011 for the course ECON 300 taught by Professor Zh during the Spring '11 term at SUNY Albany.

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ch03 - Chapter 3 Consumer Preferences and the Concept of...

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