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Consumer Choice Theory Principles of Microeconomics 2023 Boris Nikolaev
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Utility Analysis Utility = happiness (satisfaction from consumption) 1.subjective. 2. hard to measure. 3.preferences are stable.
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mmm…
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The Law of Diminishing Marginal Utility # of units consumed Total Utility (TU)Marginal Utility (MU) 00 110 28 32 40 5-2 Marginal Utility: utility from consuming one more unit of the good. Total Utility: utility from consumption so far.
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The Demand Curve
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The Model Two goods: X, Yp x = price of xp x =price of y How much X, Y should you consume? U =f(X,Y) utility function The budget constraint
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Assumptions 1.Perfect Information 2.“More is better” 3.Perfectly rational maximizing utility
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Master’s level explanation How we use calculus to solve this problem.
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The Budget Constraint
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Preferences We use indifference curves to measure preferences. = all combinations of x, y that makes you equally happy.
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Properties of indifference curves 1.As you consume more (go NE) you become happier. 2.There are infinitely many indifference curves (they never intersect). 3.Downward sloping (convex shape)
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Marginal Rate of Substitution MRS = - slope of ind. curve Minimum amount of good y you would accept in a trade for one unit of good x
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The Tangency Condition the tangency condition The slope of the indifference curve = - MRS = - P x /P y
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Economic Efficiency Pareto Superior: change in allocation of resources is PS if we can make somebody better off without making somebody worse off. Pareto Optimal: an allocation is PO if no one could be made better off without making somebody else worse off.
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