E100LectureNotes2

# E100LectureNotes2 - Lecture 2 1/10/2008 1/4/2008 1...

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1/4/2008 1 Lecture 2 1/10/2008

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1/4/2008 2 Indifference Curves and  Monotonicity Monotonic preferences imply “more” of any given good is always preferred to less of that SAME good. This is the same thing as sayng the commodity is a “good.” But we could look at economic bads! Prefs needn’t be monotonic. Apples (X a ) Bananas (X b ) 2 4 (2, 4)
1/4/2008 3 Intersecting Indifference Curves Is A preferred to B? A. Yes B. No C. Makes no sense ________________________________ A B

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1/4/2008 4 Marginal Rate of Substitution Informal Definition: If you gave up one unit of good x how many units of good y would you need to stay just as happy as you were before. ____________________________________________ X Y
1/4/2008 5 Hypothesis of Diminishing MRS Informal Definition: The more X you have (and the less Y) the less you need to be compensated for giving up one unit of X Really informal definition: ____________________________ _________________________________________________ X Y

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1/4/2008 6 Diminishing MRS and “Balance” Diminishing MRS: Individuals prefer prefer balance in consumption over extremes But there do exist goods for which this doesn’t hold (addiction). X Y A C B
1/4/2008 7 UTILITY

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1/4/2008 8 Utility Functions Succinct way to represent preferences function u “represents” preferences if and only if: Note: This is not unique! z x z u x u ) ( ) (
9 Example 1 Good 1 - apples, Good 2 – bananas Utility function representation: u(x 1 ,x 2 )=x 1 +x 2 Which do I prefer?

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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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E100LectureNotes2 - Lecture 2 1/10/2008 1/4/2008 1...

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