Lecture+11+October+13

Lecture+11+October+13 - Todays agenda Preferences and...

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Today’s agenda Preferences and utility Marginal utility approach to downward sloping demand Deriving demand curves from budget lines and indifference curves Income and substitution effects of price changes on Q D Applying consumer theory: Do taxes reduce labor supply?
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First exam scores are now available in the SAS Gradebook Approximate letter-grade equivalents A 82 – 100 B+ 79 – 81 B 70 – 78 C+ 67 – 69 C 55 – 66 D 46 – 54 F below 46
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Consumer preferences Commodity bundles Ordered lists of quantities of each commodity E.g., (28, 5, 17.9, . ...) Consumer’s preferences are a ranking of all possible commodity bundles. e.g., (3, 4.5) (2, 4.5) (3.6, 3) (2, 1.33) (0, 2)
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Consumer preferences Commodity bundles Ordered lists of quantities of each commodity E.g., (28, 5, 17.9, . ...) Consumer’s preferences are a ranking of all possible commodity bundles. e.g., (3, 4.5) (2, 4.5) (3.6, 3) (2, 1.33) (0, 2) 37 19 16 15 4 Higher “utility” numbers mean more preferred bundles.
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u Utility function
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Indifference curves are contour lines y x
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u We can slice this hill another way.
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Utility when we fix y = 5 u
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Utility when we fix y = 5 u Additional x raises utility, but at a decreasing rate
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Diminishing marginal utility u
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Fundamental rule of utility maximization Choose an affordable consumption bundle with the property that “Equal bang for the buck” B B A A P MU P MU =
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of utility maximization Suppose Spend $1 less on A. Utility falls by 3. Spend $1 more on B. Utility rises by 4.
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Lecture+11+October+13 - Todays agenda Preferences and...

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