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Ch 2 consumer theory basics

# Bit more of good 1 and be indifferent to the original

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Unformatted text preview: ot distribute. | _________________________________________________________________________________________________ The formula tells us when indifference curves will be upward sloping, downward sloping, vertical, or horizontal and vice versa (which means if the consumer tells us how much of good 2 she’ll give up for good 1 and have the same utility). Start with: Recall that: { Note: remember that if a consumer perceives all goods in her consumption set as “good” goods then she is said to have “monotone preferences”. This means (what is the direction of higher utility?): Good 1 Good 2 Indifference Curves “Good” good “Good” good Slope downwards “Bad” good “Bad” good Slope downwards “Good” good “Bad” good Slope upwards “Bad” good “Good” good Slope upwards “Neutral” good “Good” or “bad” good Horizontal “Good” or “bad” good “Neutral” good Vertical “Neutral” good “Neutral” good N/A The entire consumption set is a giant indifference set The slope of an indifference curve, now known as the , is a physical representation of a consumer’s preferences as it tells us how many units of good 2 a consumer will give up for a bit more of good 1 and be indifferent to the original bundle. Now remember that a positive monotonic transformation (PMT) of a utility function yields another utility function that represents the same set of preferences as the original pre-PMT utility function. Since the is a physical measurement of preferences it implies that while a PMT may change the utility numbers of bundles it should have no impact on the . Let’s confirm this with examples: 36 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. Linear Utility Model ⏟ ⏟ A Positive Monotonic Transformation of the Linear Utility Model ⏟ ⏟ Cobb-Douglas Utility Model ⏟ ⏟ A Positive...
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