E100LectureNotes6

# E100LectureNotes6 - Review For Midterm 1 1 Preferences...

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1/4/2008 1 Review For Midterm 1

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1/4/2008 2 Preferences Defined over bundles: (x 1 , x 2 ) (x 1 , x 2 ) Plot in coordinate system Monotonicity Indifference curves Marginal rate of substitution Slope of indif curve at a given bundle X 1 X 2
1/4/2008 3 Utility U(x 1 ,x 2 ) “Represents” preferences Attaches a number to a bundle Indif curves are level curves of U(x 1 ,x 2 ) U(x 1 ,x 2 ) not a unique representation. Increasing or decreasing transformations of U(x 1 ,x 2 ) represent same preferences It’s like renumbering indif curves X 1 X 2 U(x 1 ,x 2 )=1 U(x 1 ,x 2 )=52 U((x 1 ,x 2 ))=7

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1/4/2008 4 Marginal Utility MU 1 (x 1 ,x 2 )= : How much utility you get form one more unit of good 1. MU 2 (x 1 ,x 2 )= : How much utility you get form one more unit of good 1. Depends on how much you already have of both goods Also depends on form of utility function 1 2 1 x ) x , u(x 2 2 1 x ) x , u(x
1/4/2008 5 Utility and Marginal Rate of Substitution  To calculate MRS for differentiable utility function u(x 1 ,x 2 ): Diminishing MRS: As you go down an indif curve, slope gets flatter x 1 ↑x 2 MRS ↓ ) x , (x mu ) x , (x mu ) x , MRS(x 2 1 2 2 1 1 2 1 - = X 1 X 2

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## This note was uploaded on 04/10/2008 for the course ECON 100A taught by Professor Babcock during the Spring '07 term at UCSB.

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E100LectureNotes6 - Review For Midterm 1 1 Preferences...

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