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Chapter 3

Chapter 3

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Queen's University
ECON 212
Arthur E Stewart

Chapter 3: Consumer Preferences and the Concept of Utility Representation of Preferences  A basket/bundle is a combination of goods and services that an individual might consume  Consumer preferences are indications of how a consumer would rank any two possible bundles  assuming both are available and at no cost Assumptions about Consumer Preferences 1. Preferences are complete  the consumer can rank any and all bundles and all bundle combinations are exhausted 2. Transitivity  If A>B and B>C, then A>C 3. More is better  any basket that gives more of one good (or both goods) is preferred to any bundle that gives less of one good (or both goods) by comparison Ordinal and Cardinal Ranking  Ordinal rankings indicate whether a consumer prefers one bundle to another, but does not contain quantitative info about the intensity of that preference  Cardinal rankings are a quantitative measure of the intensity of a preference for one good over another Utility Functions  This is a function that measures the level of satisfaction a consumer receives from any basket of goods and services Preferences with a Single Good: The Concept of Marginal Utility Marginal Utility  This is the rate at which total utility changes as the level of consumption rises  The marginal utility of good x can be calculated as; MUx= ⁄ o This graphically represents the slope of the tangent line at quantity x  The additional satisfaction that is obtained from consuming an additional good depends on how much of the good has already been consumed The Principle of Diminishing Marginal Utility  Total Utility and MU cannot be plotted on the same graph o Y axis on TU measures the total utility gained from each additional y o Y axis on MU measures the marginal utility from each additional y  Marginal utility is the slope of the (total) utility function for every value of x  The principle of diminishing marginal utility states that after some point, as the consumption of a good increases, the marginal utility of that good will begin to fall o Still get more total utility from the additional consumption, but it is not a high as the one before it Is More Always Better?  If more is always better, MU x0 always  this is not true in reality o Eventually eating that x piece of cake is going to make you sick and your MU x will be negative  However, more is usually better when we are referring to amounts of the good that a consumer might actually buy Preferences with Multiple Goods: MU, Indifference Curves, & the Marginal Rate of Sub’n  Total find total utility, find the utility of x and add it to the uti
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