Ch 2 consumer theory basics

Suppose a consumer is indifferent between two bundles

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Unformatted text preview: d average. We illustrate through examples with bundles consisting of followed by goods. Consider bundles of a single good. For example, suppose combination of and will be: and ( Similarly, a 80:20 combination of and ) units of a good. Then a 50:50 () will be: ( ) () 38 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 general for ( a ) combination of and will be: ( ) ( ( Now suppose and will be: ( ) ) ( ( ) ) ) ) combination of bundles ) combination of good 2. ( ) ( ( ) ) ( ( ( ( ) ) ( ) units of goods 1 ( ) ( ) ) will be: (( ) ( ( ) ( ( ) ) and ) ) and )( ( ( ) ( ( ) and ) units of goods 1 and 2. Then a 50:50 combination of ) combination of bundles ( ( ( ( ( That is, a ( good 1 and ( ( ) and ) a ) ( ) ( In general for ( ) ) ( Now consider bundles of two goods. For example, suppose and 2. Then a 50:50 combination of and will be: ) ) ( ) ) ) ) is a bundle of a ( ) combination of A C B We can now give a formal definition of convex preferences, or a taste for variety. Suppose a consumer is indifferent between two bundles and , i.e. . Then a consumer has a taste for variety if every convex combination (“mixture”) of is preferred to either or . For consumption sets, convex preferences means that for all () ( ) ( ( ) ( ) ) 39 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. Intuitively, with convex preferences, regardless of how bundles and are combined, the bundle always lies on a higher indifference curve than and . This implies that a consumer with convex preferences always has nice smooth curved indifference curves (ones that don’t look like the coast line) – see examples below: Example: A Consumer with Convex Preferences A C B Example: A Consumer with Non-Convex Preferences A C B 40 ECO 204 CHAPTER 2 Modeling Consumer Choice and Behavior: Prefer...
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