61156 - Chapter 7 The Theory of Consumer Behavior The...

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6.1 Chapter 7 – The Theory of Consumer Behavior The Theory of Consumer behavior provides the theoretical basis for buyer decision- making and the foundation for demand. In essence, we will assume that the consumer’s goal is to maximize utility subject to a budget constraint. Thus, this theory is an application of the logic of constrained maximization.
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6.2 Assumptions of the Theory of Consumer Behavior Consumers have complete information Know goods available and utility provided Price of each good is known Income is known Consumers can rank order their preferences Given choices A and B, can determine A B or B A or A B Rationality – transitive preferences, if A B and B C then A C More is preferred to less
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6.3 Consumer Preferences and Utility Utility is a measure of the benefits received from the goods consumed. The utility function is an equation the relationship between total utility and the different combinations(bundles) of goods. U=f(X,Y,Z), where U is utility and X,Y, and Z are quantities of three goods. The utility measurement is only important to the extent that it accurately represents preferences.
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6.4 Indifference Curves An indifference curve is a locus of points indicating different combinations of 2 goods each of which yields the same level of satisfaction. Note 2 goods are assumed since we desire to present model graphically.
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Characteristics of Indifference Curves Negative slope – tradeoffs, if more of X then less of Y if utility is held constant Convex to the origin – diminishing MRS, the more of X you have relative to Y the more willing you are to trade X for Y and vice-versa. Indifference curves cannot intersect –
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61156 - Chapter 7 The Theory of Consumer Behavior The...

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