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Consumer Choice Theory Principles of Microeconomics 2023 Boris Nikolaev

Consumer Choice Theory Principles of Microeconomics 2023 Boris Nikolaev. Utility Analysis. Utility = happiness (satisfaction from consumption) subjective. hard to measure. preferences are stable. mmm …. The Law of Diminishing Marginal Utility.

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Consumer Choice Theory Principles of Microeconomics 2023 Boris Nikolaev

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  1. Consumer Choice TheoryPrinciples of Microeconomics 2023Boris Nikolaev

  2. Utility Analysis Utility = happiness (satisfaction from consumption) subjective. hard to measure. preferences are stable.

  3. mmm…

  4. The Law of Diminishing Marginal Utility Marginal Utility: utility from consuming one more unit of the good. Total Utility: utility from consumption so far.

  5. The Demand Curve

  6. The Model Two goods: X, Y px = price of x px =price of y How much X, Y should you consume? U =f(X,Y) utility function The budget constraint

  7. Assumptions • Perfect Information • “More is better” • Perfectly rational  maximizing utility

  8. Master’s level explanation • How we use calculus to solve this problem.

  9. The Budget Constraint

  10. Preferences We use indifference curves to measure preferences. = all combinations of x, y that makes you equally happy.

  11. Properties of indifference curves • As you consume more (go NE) you become happier. • There are infinitely many indifference curves (they never intersect). • Downward sloping (convex shape)

  12. Marginal Rate of Substitution Minimum amount of good y you would accept in a trade for one unit of good x MRS = - slope of ind. curve

  13. The Tangency Condition The slope of the indifference curve = - MRS = - Px/Py the tangency condition

  14. 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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