Econ112_Fall07_021808_022008

Econ112_Fall07_021808_022008 - Even rats decide. Principles...

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Even rats decide… Principles of Consumer Choice
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Key concepts Tastes or preferences Utility: total vs. marginal Diminishing marginal utility Depicting preferences: indifference curves Budget constraints Maximizing utility Demand functions
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Tastes or preferences A subjective matter Tastes vary widely across individuals A person’s tastes are assumed to be somewhat stable over time, but still subject to change. Factors that might shape our tastes? Age Gender Education Experience How can we illustrate differences in tastes?
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Utility Utility = Satisfaction Consider the utility (or satisfaction) a person gets from consuming a single good. U(X) = total utility from consuming X units of the good per unit of time (week, month, year, etc.) What would we expect U(X) to look like? Increasing or decreasing? Concave, linear, or convex? Monotonic or non-monotonic? What does the slope of U(X) represent?
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Total vs. marginal utility U(X) MU(X) = additional utility per unit of X = U/ X = slope of U(X) X X U MU
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Diminishing marginal utility Additional units of a good increase total utility by smaller and smaller amounts. 0 1 2 3 4 U X U(X)
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Negative marginal utility If the consumer becomes “satiated” with the item, additional units could detract from total utility, causing U(X) to turn downward and MU(X) to become negative. Examples? the 9th slice of pizza? the 4th slice of Mom’s chocolate cake? the 3rd example of negative marginal utility? If this does not occur within normal ranges of consumption, then MU(X) > 0 is not a bad assumption. If all goods were free, we ought to push our consumption of each good to point where MU = 0.
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Utility maximization But most goods are not free. What if we have two goods, X and Y, and the price of
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Econ112_Fall07_021808_022008 - Even rats decide. Principles...

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