Chapter 3 - Consumer preferences and the concept of utility. This chapter presents the following content: Motivation, consumer preferences and the concept of utility, the utility function, indifference curves, the marginal rate of substitution, some special functional forms. | 1 Consumer Preferences and the Concept of Utility Chapter 3 Copyright (c)2014 John Wiley & Sons, Inc. 1 2 Chapter Three Overview 1. Motivation 2. Consumer Preferences and the Concept of Utility 3. The Utility Function Marginal Utility and Diminishing Marginal Utility 4. Indifference Curves 5. The Marginal Rate of Substitution Some Special Functional Forms Chapter Three Copyright (c)2014 John Wiley & Sons, Inc. 3 Motivation • Why study consumer choice? Study of how consumers with limited resources choose goods and services Helps derive the demand curve for any good or service Businesses care about consumer demand curves Government can use this to determine how to help and whom to help buy certain goods and services Chapter Three Copyright (c)2014 John Wiley & Sons, Inc. 4 Consumer Preferences Consumer Preferences tell us how the consumer would rank (that is, compare the desirability of) any two combinations or allotments of goods, assuming these allotments were available to the . | 1 Consumer Preferences and the Concept of Utility Chapter 3 Copyright (c)2014 John Wiley & Sons, Inc. 1 2 Chapter Three Overview 1. Motivation 2. Consumer Preferences and the Concept of Utility 3. The Utility Function Marginal Utility and Diminishing Marginal Utility 4. Indifference Curves 5. The Marginal Rate of Substitution Some Special Functional Forms Chapter Three Copyright (c)2014 John Wiley & Sons, Inc. 3 Motivation • Why study consumer choice? Study of how consumers with limited resources choose goods and services Helps derive the demand curve for any good or service Businesses care about consumer demand curves Government can use this to determine how to help and whom to help buy certain goods and services Chapter Three Copyright (c)2014 John Wiley & Sons, Inc. 4 Consumer Preferences Consumer Preferences tell us how the consumer would rank (that is, compare the desirability of) any two combinations or allotments of goods, assuming these allotments were available to the consumer at no cost. These allotments of goods are referred to as baskets or bundles. These baskets are assumed to be available for consumption at a particular time, place and under particular physical circumstances. Chapter Three Copyright (c)2014 John Wiley & Sons, Inc. 5 Consumer Preferences Assumptions Preferences are complete if the consumer can rank any two baskets of goods (A preferred to B; B preferred to A; or indifferent between A and B) Preferences are transitive if a consumer who prefers basket A to basket B, and basket B to basket C also prefers basket A to basket C Complete and Transitive A B; B C = > A C Chapter Three Copyright (c)2014 John Wiley & Sons, Inc. 6 Consumer Preferences Assumptions Preferences are monotonic if a basket with more of at least one good and no less of any good is preferred to the original basket. Monotonic / Free Disposal Chapter Three Copyright (c)2014 John Wiley & Sons, Inc. 7 Types of Ranking Example: Students take an exam. After the exam, the
