Ch03 Appen

7/18/2019 Ch03 Appen

http://slidepdf.com/reader/full/ch03-appen 1/5

Slide 1

Indifference Curve Analysis of Demand

Appendix 3A

• Consumers attempt to

maximize happiness, or

utility: U!, "# over foodand entertainment

• Su$%ect to an income

constraint:

Y = PF•F + PE•E

• &raph in '(dimensions

E

F

U

Uo

Uo

7/18/2019 Ch03 Appen


Slide )

Consumer Choice ( assume

consumers can ran*

preferences, that more is $etter than less

nonsatiation#, that

preferences are transitive,

and that individuals have

diminishin+ mar+inal rates

of su$stitution

Then indifference curves slopedown, never intersect, and are

convex to the origin

F

E5 6 7

9

7

6

convex

Uo

U1U2

give up 2F for one E

7/18/2019 Ch03 Appen


Slide '

F

E

E

Uo U1

a c

demand

b

ndifference Curves• -e can .derive. a

demand curve +raphically

from maximization of

utility su$%ect to a $ud+etconstraint As price falls,

/e tend to $uy more due to

i# the ncome Effect and

ii# the !u"stitution

Effect#

PE

7/18/2019 Ch03 Appen


Slide 0

Consumer Choice 2a+ran+ians• 3he consumer choice pro$lem can $e made into a

2a+ran+ian

• 4ax 2 5 U!, "# ( 6PF•F + PE•E ( Y 7

i# ∂2 8 ∂! 5 ∂U8∂! ( 9! 5 4U!5 9!

ii#∂2 8

∂" 5

∂U8

∂"( 9" 5 4U" 5 9"

iii# PF•F+ PE•E ( Y 5

• ";uations i# and ii# are re(arran+ed on the ri+ht(hand(side

after the $rac*et to sho/ that the ratio of 4U<s e;uals the

ratio of prices 3his is the optimalit$ condition for optimalconsumption

}

7/18/2019 Ch03 Appen


Slide =

>ptimal Consumption 9oint

• ?earran+in+ /e +et the >ptimality Condition:

• %&F ' PF = %&E ' PE

@the marginal utility per dollar ineach use is equal

• 2am$da is the mar+inal utility of money

!uppose 4U1 5 ), and 4U) 5 =

and 91 5 =, and 9) 5 )=

are you maximizin+ utilityB

Documents

Ch03 Appen