Ch 2 consumer theory basics

Ch 2 consumer theory basics

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Unformatted text preview: r’s preferences and often helps us find a utility function to model a particular consumer’s choices. First, let’s see what the slope of an indifference curve tells us about preferences. {( }. Pick any bundle ) Consider a consumer with a linear utility function defined over the consumption set 9 in the consumption set: by definition, this bundle is on an indifference curve . For example, suppose that the utility ( ) which is on the indifference curve model is and that the consumer has chosen the bundle for (how do we know this?): A Now, the slope of the indifference curve at bundle is the change in good 2 over the change in good 1 along the indifference curve for . In economic terms, here is the interpretation of the indifference curve slope: the consumer is at bundle ( ). If she were to consume another unit of good 1, how many units of good 2 would she have to give up in order to continue to be on the same indifference curve (i.e. be indifferent to bundle )? To answer this question, we need to know the indifference curve slope. For the general linear utility model it is: ⏟ ⏟ ⏟ ⏟ ⏟ For the example above it is: ⏟ If the consumer were to have another unit of good 1, then to stay on the same indifference curve, she’d had to give up units of good 2 which means that she’d be at bundle 9 ( ): This statement is true for continuous utility functions (which is always the case in ECO 204) 31 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. A B As another example, assume once again that the consumer is at bundle ( ). If she were to consume an additional five units of good 1, how many units of good 2 would she have to give up and continue to be on the same indifference curve? Since the slope is , to be in the same indifference curve, she’d have to give up 7.5 units of good 2: ⏟ As such, the consumer will now be at the bundle ( ) A C In this linear utility model example, the slope of the indifference at...
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This note was uploaded on 03/20/2014 for the course ECON 204 taught by Professor Ajazhussain during the Fall '09 term at University of Toronto- Toronto.

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