Ch 2 consumer theory basics

Eco 204 s ajaz hussain do not distribute utility

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Unformatted text preview: Consumer Choice and Behavior: Preferences and Budget Constraints (this version 2012-2013) University of Toronto, Department of Economics (STG). ECO 204, S. Ajaz Hussain. Do not distribute. { Here are the various scenarios: Good 2 Good 1 “bad”, Good 2 “good” Goods 1 and 2 are “good” Good 1 “Neutral”, Good 2 “good” Good 1 “bad”, Good 2 “Neutral” Good 1 “good”, Good 2 “Neutral” Good 1 “Neutral”, Good 2 “Bad” Goods 1 and 2 are “bad” Good 1 “good”, Good 2 “bad” Good 1 Note: When Goods 1 and 2 are both “Neutral” utility is the same everywhere Here are some examples based on the linear utility model (Wolfram won’t graph 3-D surface plots nor indifference curves for the case of one or both goods being neutral): ● Example: → Both goods are “good”: 28 ECO 204 CHAPTER 2 Modeling Consumer Choice and Behavior: Preferences and Budget Constraints (this version 2012-2013) University of Toronto, Department of Economics (STG). ECO 204, S. Ajaz Hussain. Do not distribute. Utility increasing in NE direction If a consumer perceives all goods in her consumption set as “good” goods then she is said to have “monotone preferences”. ● Example: → Both goods are “bad”: Utility increasing in SW direction ● Example: → Good 1 is “good” and good 2 is “bad” 29 ECO 204 CHAPTER 2 Modeling Consumer Choice and Behavior: Preferences and Budget Constraints (this version 2012-2013) University of Toronto, Department of Economics (STG). ECO 204, S. Ajaz Hussain. Do not distribute. Utility increasing in SE direction ● Example: → Good 2 is “good” and good 1 is “bad” Utility increasing in NW direction 30 ECO 204 CHAPTER 2 Modeling Consumer Choice and Behavior: Preferences and Budget Constraints (this version 2012-2013) University of Toronto, Department of Economics (STG). ECO 204, S. Ajaz Hussain. Do not distribute. 7. The Marginal Rate of Substitution ( ) The slope of an indifference curve tells us a lot about a consume...
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