Consumer Theory - Ad-valorem=Tax/Equilibrium Price >...

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Unformatted text preview: Ad-valorem=Tax/Equilibrium Price > = preferred to A>B, means A is preferred to B ~ = indifferent to C~D, means A is indifferent to B Consumer Theory The goal of the consumer is to find the best, affordable bundle of goods. Utility is satisfaction from consumption. Bundle is some combination of goods. We often pretend that we are in a 2 good world. (C,F)=(6,9) (6 units of clothing, 9 units of food) We do NOT assume that the consumer behaves randomly. Assume consumer is a rational decision maker. Preferences tell us what's best. a.k.a. Tastes Assumptions: 1. Completeness: compare any two bundles a,b. (a>b, b>a, or a~b) 2. Transitivity: (a.k.a. rationality) for any three bundles, a, b, c. If a>b, and b>c, then a>c. 3. More is better. (Or more is preferred to less.) Between a=(5,15) and b=(6,15), b is preferred. 4. Averages are preferred to extreme convexity. Preference Maps Indifference Curves cannot be upward sloping. Properties: 1. Continuous 2. Satisfaction/Utility increases the higher the indifference curve. 3. An indifference curve exists for every possible bundle. 4. Can't cross. 5. Slope downward. 6. Can't be thick. Budget tells us what's affordable. ...
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This note was uploaded on 04/09/2008 for the course ECON 3110 taught by Professor Besedes during the Fall '07 term at Georgia Institute of Technology.

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