consumer choice theory principles of microeconomics 2023 boris nikolaev n.
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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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utility analysis
Utility Analysis

Utility = happiness (satisfaction from consumption)

subjective.

hard to measure.

preferences are stable.

the law of diminishing marginal utility
The Law of Diminishing Marginal Utility

Marginal Utility: utility from consuming one more unit of the good.

Total Utility: utility from consumption so far.

the model
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

assumptions
Assumptions
  • Perfect Information
  • “More is better”
  • Perfectly rational  maximizing utility
master s level explanation
Master’s level explanation
  • How we use calculus to solve this problem.
preferences
Preferences

We use indifference curves to measure preferences.

= all combinations of x, y that makes you equally happy.

properties of indifference curves
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)
marginal rate of substitution
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

the tangency condition
The Tangency Condition

The slope of the indifference curve = - MRS = - Px/Py

the tangency condition

economic efficiency
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.