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Lecture 5

Ecn Week 5.docx

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Department
Economics
Course
ECN 104
Professor
Debapriya Sen
Semester
Fall

Description
Ecn Week 5 October 2, 2013 7:45 AM • Consider the problem of the buyer when there are many goods • For simplicity take two goods o Prices for both goods are given o Specific amount of money available (income) o Problem: how many goods to buy • Utility: Benefit or satisfaction derived from the consumption of the good o Expressed in numbers o Can be viewed as units of happiness • Total utility: utility from consumption of a specific number of units • Marginal Utility: Utility from consumption of the last unit Principle of diminishing marginal returns o As we buy more of a good the incremental happiness derived from additional units fall o As we buy more units of a good the marginal utility falls Units Total Utility (TUMarginal Utility (MU) 0 0 1 10 10-0 = 10 2 18 18-10 = 8 3 24 24-18 = 6 4 28 28-24 = 4 5 30 30-28 = 2 6 30 30-30 = 0 7 28 28-30 = -2 8 25 25-28 = -3 Ex. Units Total UtilityMarginal UtilityUnits Total UtilityMarginal Utility (TU) (MU) (TU) (MU) 0 0 0 0 1 10 10 1 6 6 2 18 8 2 30 24 3 25 7 3 50 20 4 31 6 4 68 18 5
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