ECON 101 Lecture Notes - Lecture 4: Net Present Value, Peanut Butter, Chocolate Chip

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16 Nov 2016
Consumer Choice - Budget Constraints
- maximum Q combinations of 2 or more goods one can buy
- A “consumption possibilities curve”?
- I = PxX + PyY
- Y axis int. = I/Py = max Y, no X
- X axis int. = I/Px = max X, no Y
- Slope = Px/Py = ‘inverse’ P ratio
= ‘opportunity cost of 1 more x
Marginal Utility
Marginal U = additional unit of satisfaction per additional unit of an item consumed
The Law of diminishing Marginal Utility
- When one consumes another unit of an item, the additional utility one receives
from that decreases
- If the MU becomes negative, the good becomes ‘bad;
- Ex. if you eat too many candy bars and you become sick ‘negative’
MU/P(item a) > MU/P(item B) = Item A is more economical
Indifference Curves & Utility Max (graphically)
Indifference Curves - a line that shows different combinations of two goods (or bundles
of goods) that yield the same level of utility for an individual
- Slope = marginal rate of substitute
- Highest obtainable curve is to the right
Perfect Substitutes**
- Straight line indifference curves
- Willing to exchange Y for X at constant rate regardless of Qs of Y and X
- Example: peanut butter cookies or chocolate chip, ethanol or premium gas
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