Chapter3

Assumptions of the consumers preference completeness

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Consumer’s Preference. Assumptions of the Consumer’s Preference: Completeness Consumer is able to rank all possible bundles. Non-satiation Consumer always want more of a product ceteris paribus. Transitivity If bundle A is better than bundle B and bundle B is better than bundle C then bundle A must be better than bundle C. Convexity Consumer prefers a little of anything.

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Consumer’s Preference Consumer’s Preference is graphically expressed by the Indifference Curve. Indifference curve is a set of bundles which are equally preferred. Most of the time, we deal with the case where the indifference curve is convex toward the origin. Slope of the Indifference Curve at a point is called the Marginal Rate of Substitution (MRS) how many (vertical) good a person is willing to give up to get an additional (horizontal) good. The MRS gives the marginal benefit of good X in terms of good Y.
Consumer’s Preference. Mathematical expression of a Consumer’s Preference – the Utility Function. Additive utility functions (if goods are perfect substitutes ) Linear utility function. Example 1: U(x , y)=x + y Example 2: U(x , y)=ax+by Multiplicative utility functions Cobb Douglas. Convex to the origin utility function. Example 1: U(x , y)=xy Example 2: U(x , y)= Of the form min of (ax , by) (if goods are perfect complements Leontief. L-shape utility function. Example 1: U(x , y)=min[x , y] Example 2: U(x , y)=min[2x , 3y]

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Consumer’s Preference Graphical Presentation of the Consumer’s Preference. 0
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• Fall '12
• Danvo
• Utility, Cobb Douglas utility

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