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Consumer Behavior, Market Baskets

market baskets (bundles) - group of goods 

  • how/why consumers decide how much of each good to buy
  • assumptions about preferences - consumers often behave erratically, but assumptions must be made for models
    • completeness - all goods are ranked (either above/below, or tied for a rank)
    • transitivity - if A preferred to B and B preferred to C, then A preferred to C
    • more > less - consumers always want more for less

indifference curve - all combinations of market baskets providing same satisfaction 

  • matches up market baskets where there’s more of 1 good and less of another from the preferred basket
  • market baskets above/right of curve is preferred to any basket on curve
  • must slope downward (or else violates assumption that more > less)

 

  • consumer is indifferent between baskets A, B, or C, since they lie on the same indifference curve
  • A, B, C preferred to basket E, not as preferred as basket D
  • baskets on an indifference curve have more of 1 good but less of another when compared to other baskets on the curve

 

  • indifference map - describes preference for all combinations
    • set of indifference curves, can’t intersect
  • marginal rate of substitution - max amount of 1 good that consumer is willing to give up for 1 extra unit of another good
    • calculated w/ respect to vertical axis
    • convex indifference curves >> decreasing marginal rate of substitution

 

  • perfect substitute >> linear line graph >> constant marginal rate of substitution
  • if 1 good is the same as another, it doesn't matter how many of each you have
  • only the total number matters
  • U = A + B

 

  • perfect complement >> need both to gain satisfaction >> right angle graph
  • ex. buying left/right shoes
  • it doesn't matter how many right shoes you have if you don't have a left shoe to match
  • consumer indifferent between a basket containing 1 right and 1 left shoe and another basket containing 1 right and 15 left shoes
  • U = min(A,B)

utility function - assigns numerical values to market baskets

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