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    Microeconomics: Unit 2 - Consumer's Theory - MIT

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    Fernando Dilton

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    Microeconomics: Unit 2 - Consumer's Theory - MIT

    Uploaded by

    Fernando Dilton
    23 views3 pages

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    Microeconomics: Unit 2 – Consumer’s Theory | MIT

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    23 views3 pages

    Microeconomics: Unit 2 - Consumer's Theory - MIT

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    Microeconomics: Unit 2 – Consumer’s Theory | MIT about:reader?url=https://pgderolle.wordpress....

    pgderolle.wordpress.com

    Microeconomics: Unit 2 –
    Consumer’s Theory | MIT
    Patricia Galves Derolle

    3 minutos

    Unity 2: Consumer’s Theory

    Utility Maximization: 3 steps

    1.  Assumptions about preferences

    1.1. Completeness: when you compare, you have a


    favorite. One cannot be indifferent or not sure about a
    certain bundle of goods.

    1.2. Trasitivity

    1 of 3 16/12/2020 11:28
    Microeconomics: Unit 2 – Consumer’s Theory | MIT about:reader?url=https://pgderolle.wordpress....

    1.3. Non-satiation (more is always better)

    // Properties of indifference curves

    An indifference curve is a curve showing all combinations


    of consumption along which an individual is indifferent.
    Higher indifference curves are better (non-satiation); they
    are always downward sloping; they cannot cross and there
    is one indifference curve per bundle.

    2.  Utility functions: it’s the mathematical


    representation of preferences.

    2.1. Marginal Utility: how your utility changes with each


    additional unit of the good, or the derivative of the utility
    function, that means that each additional thing, diminishes
    your utility (it diminishes because it is worth less to you
    and it is positive because of non-satiation).

    2.2. Marginal Rate of Substitution: it’s the rate at which you


    are willing to trade-off the Y-axis for the X-axis. MRS =
    -MUm(x)↓ / MUp(y)↑

    3. Budget constraints (ignore savings, budget =


    income)

    3.1. Concept of Opportunity Cost: value of the foregone


    alternative

    3.2. Constrained choice: what’s the highest utility you can


    achieve given the budget constraints? Intuitively: what’s the
    most you can have given the constraints that are placed on
    you? Graphically: what’s the furthest out indifference curve
    you can achieve?

    2 of 3 16/12/2020 11:28
    Microeconomics: Unit 2 – Consumer’s Theory | MIT about:reader?url=https://pgderolle.wordpress....

    3.3. Marginal Rate of Substitution: ratio of the marginal


    utilities. It’s the negative of the marginal utility of movies
    over the marginal utility of pizza (-x / y). It’s the rate at
    which you’re willing to substitute between movies and
    pizza, which is a function of your marginal utilities. If your
    marginal utility for movies is very high, then you need a lot
    of pizzas. If your marginal utility of movies is very low,
    you’d be happy to give up a movie even for a small fraction
    of pizza.

    MRS = – x / y = budget constraint slope = MRT = -Pm /Pp

    Benefits = Costs (maximization)

    MUmovies / Pmovies = MUpizzas / Ppizzas

    Publicado por Patricia Galves Derolle

    Sobre mim: http://br.linkedin.com/in/patriciagalvesderolle/


    Ver todos os posts por Patricia Galves Derolle

    3 of 3 16/12/2020 11:28

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