Ch 2 consumer theory basics

Only ideally models of consumer choice

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Unformatted text preview: i or Joso’s (beware Joso’s NSFW and kitschy site) and represents the fact that you cannot be in both places at once: {( )( ) )} ( The third consumption set is for a situation where both goods must be consumed in integer amounts only: {( { ) } { }} Ideally, models of consumer choice would use consumption sets that are specific to the situation being modeled. Again, for tractability (for calculus based methods) we assume that individuals can consume any non-negative quantity of a commodity so that the ECO 204 consumption set is: { } ) in the consumption set is known as a “bundle” of goods 1 and 2. A bundle “inside” the A particular point ( consumption set is known as an “interior bundle” and has positive amounts of both goods (i.e. ) while a bundle on any “edge” or “boundary” of the consumption set is a “boundary bundle” and has zero amounts of at least one good, i.e. either or or . This implies that in our model of consumer choice where we’ll try to understand, explain, and predict a consumer’s choice of which bundle in she’ll consume, we’ll have to constrain her choices to6: ⏟ {( 6 ) } Note: You’ve already seen these non-negativity constraints in lectures when we did Utility Maximization Problems (UMP) 5 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. Boundary Bundle Interior Bundle Interior Bundle Boundary Bundle Boundary Bundle The consumption set tells us which bundles of commodities is physically available for consumption; it does not tell us which bundles are affordable nor does it tell us anything about the consumer’s preferences. To be able to model consumer choice (the bundle(s) the consumer will choose) we need a way to represent preferences over all bundles and identify and which bundles are affordable. 3. A Consumer’s Preferences over bundles in the Consumption Set To m...
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