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Intermediate microeconomics: Lecture 3
Utility and indifference curve Budget constraint Consumer’s problem
Perfect complement Perfect substitute
Intermediate microeconomics: Lecture 3
March 14, 2014
Preference over bundles
Intermediate microeconomics: Lecture 3
Utility and indifference curve Budget constraint Consumer’s problem
Perfect complement
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Two goods 1 and 2. Let (x, y ) be quantity of good 1 and good 2. Now, we can define preference over (x, y )
Perfect substitute
Rational preference
Intermediate microeconomics: Lecture 3
Utility and indifference curve Budget constraint Consumer’s problem
Perfect complement Perfect substitute
◮
If your taste is rational, we can find a utility function U(x, y ) If “more” is better, your preference is monotonic, U(x, y ) is increasing in each x and y . If your taste is continuous, U(x, y ) is a continuous function.
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Monotonicity
Intermediate microeconomics: Lecture 3
Utility and indifference curve Budget constraint Consumer’s problem
Perfect complement Perfect substitute
Figure:
Indifference curve
Intermediate microeconomics: Lecture 3
Utility and indifference curve Budget constraint
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Given (x, y ), find (x ′ , y ′ ) such that (x ′ , y ′ ) ∼ (x, y ) When you collect all indifferent pair (x ′ , y ′ ), you can get the indifference curve. Recall that U(x, y ) = U(x ′ , y ′ ) if (x ′ , y ′ ) ∼ (x, y ). Roughly put, you feel the same level of happiness from any pair (x, y ) on the indifference curve.
Consumer’s problem
Perfect complement Perfect substitute
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Indifference curve
Intermediate microeconomics: Lecture 3
Utility and indifference curve Budget constraint Consumer’s problem
Perfect complement Perfect substitute
Figure:
Utility and indifference curve
Intermediate microeconomics: Lecture 3
Utility and indifference curve Budget constraint Consumer’s problem
Perfect complement Perfect substitute
Figure:
Convex...