Ch 2 consumer theory basics

Modeling consumer choice and behavior preferences and

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Unformatted text preview: +3q2 from q1=0,10 q2=0,10 8 For 3 goods the linear utility function is and for goods it is ∑ 24 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. For example, in the diagram below, the consumer is indifferent between bundles indifference curve): (and all bundles on that A B C It is very easy to get the equation of an indifference curve corresponding to an arbitrary level of utility as follows: ⏟ ⏟ In general, the equation of an indifference curve of the linear utility model is: In the previous example notice that the consumer perceives both goods as “good” goods since that the indifference curves are downward sloping with a constant slope of ⏟ and : ⏟ 25 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. In Wolfram Alpha type plot u=2q1+3q2 from q1=0,10 q2=0,10 Now consider a different example: here the consumer perceives both goods as “bad” goods since ⏟ ⏟ Notice how the utility mountain slopes downwards from the origin and that the indifference curves of this model are also downward sloping with a constant slope of : 26 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. In Wolfram Alpha type plot u=-2q1-3q2 from q1=0,10 q2=0,10 The indifference curves for both utility models have the same slope of This is despite the fact that in one model both goods are “good” whereas in the other model both goods are “bad”. So what’s the difference? In the “good” goods case utility is increasing towards the north east whereas in the “bad” goods case utility is increasing towards the south west: Both goods are “good” Both goods are “bad” Without colors or numbers on indifference curves, it’s hard to tell whether each good is bad, good, or neutral. As such, to help the reader, it’s a good idea to put an arrow in the direction of higher utility: 27 ECO 204 CHAPTER 2 Modeling...
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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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