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Economics 2150A/B

Ch 3Goal Develop a Model of Consumer behaviour to Derive demand curvesCalled theory of Rational Consumer ChoiceCh 3Develop a way to model consumer preferences with utility curvesCh 4Add a budget constraint to get consumer maximization problem and the Ordinary Demand CurveCh 5Applications of Demand TheoryIConsumer Theory assumes selfinterest and rationality among consumersselfinterest the consumer will behave in a way that maximizes his or her satisfaction utilityIndifference curves IC represent the level ofutility that the consumer derives from consuming particular bundles of goods in a world where there are only two goodsShape of the indifference curves will represent the relative preference that the consumer has for one good over the other goodII Selfinterest assumption is a strong assumptionSays Individuals always make choices to make themselves better offA Experimental economics Reality preferences are less welldefined in childrenB The theory of selfinterest does not eliminate the possibility of charitable givingCharitable giving can be explained with selfinterest if weExpress the consumers utilitysatisfaction as a function of someone elses utilityDonating to charity and making others happy may raise the utility of an individual if that individual cares about the consumption or utility of another individualIII Bundle of GoodsA Assume there are only 2 GoodsClothing and FoodThe point H represents a consumption bundle in which the person consumes 0 units of Food F and 30 untis of Clothing CPoint Dbundle with 20 units of F and 10 units of C2010B Consumer preferences tell us how a consumer would rank these Market baskets assuming the baskets are available at no costIV Preference postulates If a consumer is rational then we assume that the preferences possess three important characteristics 1 Completeness2 Transitivity3 More is BetterThese are the 3 underlying assumptions behind utility functions 1 Preferences are completeThe consumer can always rank any 2 bundles in the spaceAB or BA or ABEither
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