Ch03 - Chapter 3 Consumer Preferences and the Concept of...

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Chapter 3 Consumer Preferences and the Concept of Utility
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Representations of Preferences Basket (or bundle ): A combination of goods and services that an individual might consume. Example: one basket of goods might include a pair of jeans, two pairs of shoes, and 5 pounds of chocolate candy. A second basket might include two pairs of jeans, one pair of shoes, and 2 pounds of chocolate candy. Suppose that a consumer can purchase only two goods, food and clothing. Seven possible consumption baskets are illustrated in the next figure. For example, basket E contains 20 units of food and 30 units of clothing. Consumer preferences: Indications of how a consumer would rank (compare desirability of ) any two possible baskets, assuming the baskets were available to the consumer at no cost.
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Representations of Preferences
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Assumptions about Consumer Preferences Three basic assumptions Preferences are complete : The consumer is able to rank any two baskets. For any given two baskets, the consumer can state her preferences according to one of the following: She prefers basket A to B . She may prefer basket B to A. She is indifferent between baskets A and B . Preferences are transitive : The consumer makes choices that are consistent with each other. If a consumer prefers basket A to B , and prefers basket B to E , then she prefers basket A to E . More is better : Having more of a good is better for the consumer. She prefers basket A to E or H (same amount of clothing, more food). She prefers basket A to B or J (same amount of food, more clothing). She prefers basket A to G or D (more food, more clothing).
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Ordinal and Cardinal Ranking Ordinal ranking: Ranking that indicates whether a consumer prefers one basket to another (gives the information of order ), but does not contain quantitative information about the intensity of that preference. Ordinal ranking would not tell us how much more she likes A than D . Cardinal ranking: A quantitative measure of the intensity of a preference for one basket over another. Cardinal ranking would tell us that she likes A than D and how much more she likes A than D : “The consumer likes basket A twice as much as basket D .”
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Utility Functions Utility function: A function that measures the level of
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Ch03 - Chapter 3 Consumer Preferences and the Concept of...

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