Class 4s - Department of Economics LeBow College of...

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Department of Economics Fall 2009 LeBow College of Business Microeconomics 301 Drexel University Professor Stehr Class 4 Outline 1. Utility maximization and consumer choice 2. Revealed Preference Utility Maximization Consumers seek to maximize utility given their budget constraint. Utility maximizing bundle lies on the budget constraint. If the consumer were to choose some bundle A that is inside the budget line, some other bundle B would be available that had more of both goods and hence would be preferred to A. 1
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Utility maximizing bundle must have the property that MRS = P x /P y . Why should MRS = P x /P y ? Suppose it doesn’t. Say MRS= 2, P x =1, P y = 1 Exception: Corner Solution, where MRS ≠ P x /P y A consumer might, for example, choose a point on the x-axis if he would like to give up more y to get more x in return, but isn’t able to do so because he has 0 units of y. 2
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Marginal Utility (MU) MU declines as we consume more of the good for most goods. Exception: Addictive goods like cigarettes or practice goods like hours of tennis or hours of World of Warcraft III. Show that MU
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This document was uploaded on 10/17/2011.

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Class 4s - Department of Economics LeBow College of...

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