Econ cheat sheet 2

Econ cheat sheet 2 - Property Its important how it ORDERS...

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Property: It’s important how it ORDERS the bundle of good. The MAGITUDE of the utility function is only important as it Ranks THE DIFFERENT consumption bundle. A monotonic function is one that always increases or always decreases. Monotonic transformation is a way of transforming one set of numbers into another set of numbers in a way that preserves the order of the numbers and represents the same preferences as the original. Eg. Multiplication by a positive number, add any number, raising u to an odd number f(u2)-f(u1) always has the same sign as u2-u1, a positive rate of change sub:U(x1,x2)=ax1+bx2 slope:-a/b G: U(x1,x2)=2x1+x2 the consumer requires 2 units of good2 to compensate him for giving up 1 unit of good1; good 1 is twice valuable to consumer Demand bundle:(x1*,x2*)=(m/p,0) if p1<p2 =(0, m/p2) ifp1>p2 any number b/t1 and m/p1 if p1=p2 G: Complement: U(x1,x2)=min(ax1,bx2) MRS=-x2/x1 G: (x1=1 tea, x2=2 sugar,: min(x1,0.5x2) Demand Bundle: (x1*, x2*)=(m/(p1+p2),m/(p1+p2) Quasilinear: U(x1,x2)=K=V(x1)+x2 G:
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