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we use three properties of preferences to predict which combinations or bundles of goods an individual prefers to other combinations
we summarize a consumers preferences using a utility function, which assigns to each possible bundle of goods a numerical value, utility, that reflects the consumers relative ranking of the bundles
The budget constraint
prices and consumers' limited budgets constrain how much they can buy and determine the rate at which a consmer can substitute one good for another.
What are three properties of consumer preference?
Completeness (consumer prefers some bundles more than others, and also can be indifferent between two bundles)
Transivity (the consumer prefers a to b, and b to c, therefore prefers a to c)
More is better
What are four properties of indifference curves?
1. Bundles on indifference curves farther from the origin are preferred to those on indifference curves closer to the origin.
2. An indifference curve goes through every possible bundle.
- 3. Indifference curves cannot cross
- 4. Indifference curves slope downward.
What is marginal rate of substitution?
MRS shows the rate at which a consumer can substitute one good for another while remaining on the same indifference curve. IT's the amount of one good a consumer will sacrifice to obtain on emore unit of the other good.
A straight line indifference curve reflect
perfect substitutes, which are goods that essentially equivalent from the consumers point of view
What is the marginal rate of transformation?
the slope of the budget line.... it shows the trade off the market imposes on the consumer in terms of the amount of one good the consumer must give up to purchase another good.
Linda loves buying shoes and going out to dance.
Her utility function for pairs of shoes, S, and the
number of times she goes dancing per month, T,
is U(S, T) = 2ST, so MU5 = 2T and MUT = 25.
It costs Linda $50 to buy a new pair of shoes or to
spend an evening out dancing. Assume that she has
$500 to spend on clothing and dancing. (Hint: See
What is the equation for her budget line? Draw
it (with T on the vertical axis), and label the
slope and intercepts.
- 50S + 50T = 500 ® S + T
- = 10
Economies of scope
is the situation in which it is less expensive to produce goods jointly than seperately
diseconomies of scope
is the situation in which it is less expensive to produce goods separately than jointly.
Firms will maximize profit by producing where the ratio of
marginal product of labor to the marginal product of capital is equal to the input prices
On the demand curve, elasticity of - 1 is...
At the midpoint. Above is elastic, below is inelastic.