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Consumer Choice
100
400
450
450
300
200
Consumer Choice
100
B
400
450
450
300
200
C
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Good 2
200
300
350
Good 1
Consumer Choice
Consumer Preferences
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Increasing
utility
x1
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Consumer Choice
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Increasing
utility
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x yields no
utility at all!
Consumer Choice
Consumer Choice
A
x
Consumer Choice
If convexity is violated, then the preference map may look like this:
y
Increasing
utility
B
C
A
Consumer Choice
Preferences that are weakly convex, but not strictly convex, have
linear indierence curves:
y
C is preferred
equally with A
and B
B
C
Consumer Choice
4
5
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A
Q
x
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Consumer Choice
Utility Functions
The utility function U is the relationship between utility measures and
every possible bundle of goods.
If we know the utility function, we can summarize the indierence
map succinctly.
If the bundle ( x1 , y1 ) is preferred to the bundle ( x2 , y2 ), then
U ( x1 , y1 ) > U ( x2 , y2 ).
p
Consider the utility function U = q1 q2 .
p
The bundle (16, 9) yields utility p16 9 = 12.
The bundle (13, 13) yields utility 13 13 = 13.
So the above utility function suggests that the second bundle is
preferred to the rst.
U ( x, y) = U.
Consumer Choice
Consumer Choice
Marginal Utility
Marginal utility: the additional utility from an extra unit consumed
(keeping all else constant).
Mathematically,
U ( x, y)
.
x
p
Consider the utility function U = q1 q2 .
q
The marginal utility of good q1 is U/q1 = 21 q1 1/2 q1/2
= 12 qq21
2
MUx =
U
q1
1
2
Consumer Choice
q2
q1
is decreasing in q1 .
U (q1 , q2 (q1 )) = U.
Dierentiate with respect to q1 :
MU1 + MU2
dq2
= 0.
dq1
dq2
=
dq1
MU1
.
MU2
Consumer Choice
Consumer Choice
q1 1 q12
MU1
q2
=
=
MU2
(1 ) q1
(1 ) q1 q2
The two goods are imperfect substitutes. The indierence map is:
q2
Increasing
utility
q1
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MUC
=
MUG
i
j
Consumer Choice
Consumer Choice
U4
U3
U2
U1
Consumer Choice