1 / 11

Chapter 2

Chapter 2. Consumers and Their Preferences. Unit of Analysis: Consumption Bundles. Good 2 ( x 2 ). b. 50. 25. a. 12. Good 1 ( x 1 ). 0. 20. 25. 50. The consumption possibility set. Assumptions on consumption possibility sets Divisibility Goods are infinitely divisible

margie
Download Presentation

Chapter 2

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. Chapter 2 Consumers and Their Preferences

  2. Unit of Analysis: Consumption Bundles Good 2 (x 2) b 50 25 a 12 Good 1 (x 1) 0 20 25 50

  3. The consumption possibility set • Assumptions on consumption possibility sets • Divisibility • Goods are infinitely divisible • Additivity • It is possible to add consumption bundles • Convexity • It is possible to combine two bundles to produce a third by consuming fractions of them: c=λa+(1-λ)b

  4. A convex set Oranges A (2,4) B (14,2) Apples If A and B are in the budget set, then any combination budget C, where c=λa+(1-λ)b is also in the budget set.

  5. The Budget Line • Income or budget line • Income • Prices for goods

  6. Income constraints b Good 2 (x 2) c d e 6 6=2x1+1x2 a 2 Good 1 (x 1) 0 2 3

  7. Psychological Makeup of Agents • Agents have preferences that satisfy the following rationality assumptions • R = “at-least-as-good-as” • For any three bundles a, b and c • Rationality Assumptions: • Complete Binary Ordering • aRbor bRa or Indifferent between a and • Reflexivity • aRa • Transitivity • If aRb and bRc, then aRc

  8. Utility Functions • Utility: Level of satisfaction from consumption of a bundles • Based on the three rationality assumptions an agent can rank any group of bundles • A Utility function assigns a number to each bundle such that bundles with a higher number are preferred bundles

  9. Examples of Utility Functions • Additive utility function: U=x+y • Multiplicative utility function: U=xy

  10. Psychological Assumptions • Selfishness • Agents care about their consumption • Nonsatiation • More of anything is always better • Convexity of preferences • Indifferent: bundle a and bundle b • Prefer (or indifferent): a combination, c • Bundle c: at least as good as a or b

  11. Nonsatiated preferences b Good 2 (x 2) Ub a Good 1 (x 1) Giving an agent more of any good must raise his utility. All other bundles in area Ub are strictly better than bundle b.

More Related