Economic Analysis ECON 100A
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This 3 page Class Notes was uploaded by Dr. Janiya Bernier on Thursday October 22, 2015. The Class Notes belongs to ECON 100A at University of California - Berkeley taught by Staff in Fall. Since its upload, it has received 14 views. For similar materials see /class/226717/econ-100a-university-of-california-berkeley in Economcs at University of California - Berkeley.
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Date Created: 10/22/15
Section Notes 4 Econ 100A Spring 06 SECTION NOTES 4 Covering material from Lecture on January 24th CLASS OUTLINE 1 Indifference Curves and Utility Functions 2 Budget Constraints 3 Practice Problems 1 Indifference Curves and Utility Functions Before analyzing consumer behavior we need some basic assumptions and de nitions1 Table 1 ASSUMPTIONS ABOUT PREFERENCES What it means Every possible consumption bundle is ranked lfABandBCthenAC More is always better Convex Indifference Curves Assumption 1 Completeness 2 Transitivity 3 Nonsatiation 4 Diminishing Marginal Rate of Substitution MRS Indifference Curve All bundles of X Y that give the same level of utility for a consumer ie the two bundles X1 Y1 and X2 Y2 are on the same indifference curve for a consumer if and only if UX1 Y1 UX2 Y2 What are some of the different ways preferences can be represented graphically Make sure to pay attention to those that show a diminishing MRS 1Assumption 4 or diminishing MRS is sometimes relaxed It all depends on the utility function being used Section Notes 4 Econ 100A Spring 06 2 2 Budget Constraints A budget constraint creates a set of feasible consumption points In order to see this graphically we focus on the budget line Budget Line All combinations of goods for which the total amount of money spent is equal to income7 ie if PXX PyY I Notice the exogenous pieces of information that determine the budget line If any of these change7 we will see a change in the budget line Graphically we have There is no fundamental reason Why budget lines can t have kinks or at points If prices change after a certain amount of purchases7 or there is no cost for a certain amount7 the budget line can change You tell me some real world examples of when this can happen Section Notes 4 Econ 100A Spring 06 3 3 Practice Problems Problem PampR Chapter 3 Exercise 3 If Jane is currently willing to trade 4 movie tickets for 1 basketball ticket then she must like basketball better than movies True or false Problem PampR Chapter 3 Exercise 5 Suppose that Bridget and Erin spend their incomes on two goods food and clothing Bridget s preferences are represented by the utility function UF C 10FC while Erin s preferences are represented by the utility function UF C 20F2C392 a With food on the horizontal axis and clothing on the vertical axis identify on a graph the set of points that give Bridget the same level of utility as the bundle 105 Do the same for Erin on a separate graph b On the same two graphs identify the set of bundles that give Bridget and Erin the same level of utility as the bundle 158 U DO you think Bridget and Erin have the same preferences
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