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# class 3 post - Class 3 Preferences and Utility Problem Set...

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Class 3 Preferences and Utility

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Problem Set 2
Problemset 3: Due Wed/Thrus

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MathReview 2: Due Wed/Thursday next Week

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What we did last time: ± Use elasticity to summarize information on slope ± Use elasticity to predict: ± Impact of Supply Shocks pact of Taxes ± Impact of Taxes
Outline iscussion: ± Discussion: ± When is “Demand = Supply” a good Assumption? ± Preferences: ± Rational and Normal Consumer Preferences ± Representing Preferences by ± Indifference Curves ± Utility ± udget Constrains Budget Constrains ± Optimal Choice I

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Outline iscussion: ± Discussion: ± When is “Demand = Supply” a good Assumption? ± Preferences: ± Rational and Normal Consumer Preferences ± Representing Preferences by ± Indifference Curves ± Utility ± udget Constrains Budget Constrains ± Optimal Choice I
Supply can be different from Demand he quantity that is sold is always equal to the quantity that is ± The quantity that is sold is always equal to the quantity that is bought ut demanded quantity does not need to equal supplies quantity: ± But demanded quantity does not need to equal supplies quantity: ± Michigan Stadium: More demand for seats than supply ± Price ceilings for rents ± Price floor for wage 1 Supply p Demand Price Ceiling 1 0 q Excess Demand

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Discussion: Demand = Supply e have used the assumption of market clearance for ± We have used the assumption of market clearance for predictions: ± Change of Input price (hogs) hange of Supply ± Change of Supply ± Change of Taxes ± When is this assumption a good approximation? ± It’s a good approximation if market forces towards equilibrium are strong: ± Many sellers and buyers ± Transparent market / Single Market price ± No quality problems o collusion / cartels ± No collusion / cartels ± Low fixed costs ± Positive Examples: Agriculture, Stocks of major companies, … ± Negative Examples: Computer Operating Systems, Electricity grid, Oil (OPEC), …
Example: Local Fish Markets 1 Market 1 upply p Supply 1 0 1 Market 2 Supply 1 0 q p

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Example: Local Fish Markets and Cell Phone formation Reduces Price Dispersion ± Information Reduces Price Dispersion From: Robert Jensen (2007), Quarterly Journal of Economics http://www.stanford.edu/~jayachan/econ214/jensen.pdf http://www.washingtonpost.com/wp-dyn/content/article/2006/10/14/AR2006101400342.html
Outline iscussion: ± Discussion: ± When is “Demand = Supply” a good Assumption? ± Preferences: ± Rational and Normal Consumer Preferences ± Representing Preferences by ± Indifference Curves ± Utility ± udget Constrains Budget Constrains ± Optimal Choice I

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Preferences: Bundles =(q A A q 2 B A ; Three Relations: A is strictly preferred to B q 2 A A( q 1 , q 2 ) B A ; A is at least as good as B A ~ B A is as good as B (indifferent) B B=(q 1 B , q 2 B ) Relation: nd en q 2 If A B and B A , then A ~ B If A~B , then B~ A If AB , then BA ; ; ; ; o q 1 B q 1 A q 1 A ; B : “If asked to choose between A or B , consumer would choose A
Preferences: Rationality ational Preferences ormal Consumer Preferences Rational Preferences ± Complete:

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## class 3 post - Class 3 Preferences and Utility Problem Set...

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