Week 1 Notes beta
Week 1 Notes beta FIN 501
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This 2 page Class Notes was uploaded by D S on Wednesday September 23, 2015. The Class Notes belongs to FIN 501 at University of Illinois at Urbana-Champaign taught by Tatyana Deryugina in Summer 2015. Since its upload, it has received 121 views. For similar materials see Financial Economics in Finance at University of Illinois at Urbana-Champaign.
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Better than the professor's notes. I could actually understand what the heck was going on. Will be back for help in this class.
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Date Created: 09/23/15
Financial Economics Week 1 Professor Tatyana Derugvina University of Illinois Urbana Champaign Text 1 Utility maximization and elasticities De nitions Preference should be internally consistent Rationality Completeness for any A and B7 either A 2 B or B Z A or both Transivity if A 2 B and B 2 C7 then A 2 C transitivity of indifference preference emergs when larger comparison ie 1 mg to 2mg vs 1mg to 50 mh Continuity if A prefers B then situations closely to A must also prefer B think continuous function Utility idea of assigning ranking to different items Utility Function U assigns numbers to bundles of commondities and represents a decision maker s preferences iff UA Z UB Continuou utility function holds when someone has satis es continuity in their rational preferences U is ordinal and thus one does not know the intensity of the preferene only one is better U is not unique and thus can be scaled they represent an individual s preferences so one cannot compare two individuas preferences 3 Common Examples of Utility Function sample equation Cobb Douglas Uxy may where oz 6 positive constants Perfect Substitution Wxy 2 oz x 6 y Perfect Complement xed porportion Uxy minoz17 6y Indifference curve An indifference curve or7 in many dimensions an indifference surface shows a set of consumption bundles about which the individual is indifferent That is7 the bundles all provide the same level of utility Starting class lecture Utility maximization and elasticities Utility Maximization Problem UMP max uxy subject to pma pyy S m xy Z 0 optimal point for UMP graphically is the point of tangency between the budget line and an indifference curve 2 ways to solve UMP either with Lagrangian or just noticy the point of tangency have equal slopes MRS Ij ZI 1k py Final equation 3 90 3 pg 2 class examples in the notes UX7Y Xy UXy 513 31 Elasticity discussions Income Elasticity Price Elasticity Cross Price Elasticity 2 Side comments spent quite a bit of time talking about giffen goods ie rice in china also note tht all goods cannot be inferior at all income levels In order for a good to be inferior then you consume more of it as income falls As incomes goes to zero7 then at some point it Will not be possible to consume more as income falls because there won t be enough income to consume more
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