Lecture8 - Lecture 8 Finding the consumption bundle for...

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Lecture 8 Finding the consumption bundle for perfect complements Income and substitution effects for perfect complements Consumer surplus Network effects Introduction to uncertainty and consumer behavior: expected value and variance; risk preferences
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Consumption bundles for perfect complements Budget line: Utility function for perfect complements: U(X,Y) = min{X, 2Y} Maximize the minimum when X = 2Y X Y U1 U2 Y Y X 2 4 2 4 8 = = 2 ; 2 ; 1 ; 4 4 2 4 2 = = = = => = = U X Y Y Y Y X 8 4 2 = + Y X
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Income and substitution effects for perfect complements For perfect complements, substitution effect = 0; income effect explains entire change in consumption bundle due to a price change. A B
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How much additional value do consumers receive from purchases in a single market? Issues: Interpersonal comparisons Individual or market demand? Price is the value for the marginal user; CS measures inframarginal values. Market price
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Lecture8 - Lecture 8 Finding the consumption bundle for...

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