Lecture Notes 3

Lecture Notes 3 - Consumer Theory Framework for empirical...

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Consumer Theory Framework for empirical analysis of demand, savings behavior, and labor supply Foundation of normative economics (permitting prescriptive policy analysis) “Rational choice” – the consumer chooses that which is best according to his/her tastes, among the feasible options .
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The Consumer’s Budget Constraint
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The Consumer’s Budget Constraint Quantity of Pizza Quantity of Pepsi 0 Consumer’s budget constraint 500 B 250 50 C 100 A The slope of the budget constraint is -5, the negative of the ratio of the goods’ prices.
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The Consumer’s Preferences Quantity of Pizza Quantity of Pepsi 0 Indifference curve,  I 1   I 2 1 MRS C B A D MRS = (marginal utility of pizza) (marginal utility of Pepsi)
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Indifference Curves: Perfect  Substitutes Dimes 0 Nickels I 1 I 2 I 3 3 6 2 4 1 2
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Indifference Curves:  Perfect Complements Right Shoes 0 Left Shoes I 1 I 2 7 7 5 5
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Bowed Indifference Curves Quantity of Pizza Quantity of Pepsi 0 Indifference curve 8 3 A 3 7 B 1 MRS  = 6 1 MRS  = 1 4 6 14 2 thirsty hungry
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The Consumer’s Optimum Quantity of Pizza Quantity of Pepsi 0 Budget constraint I 1 I 2 I 3 Optimum A B The consumer would prefer to  be on indifference curve I
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Lecture Notes 3 - Consumer Theory Framework for empirical...

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