ECN 203 1st Edition Lecture 3 Outline of Last Lecture II Definitions III Our Assumptions IV Diminishing Marginal Utility a MU b TU V Marginal Utility with Multiple Choices VI The Initial Decision Rule Outline of Current Lecture VII Relaxing our No Scarcity Assumption VIII Relaxing our No Production Necessary Assumption a Value from marginal product IX Relaxing our No Future Assumption a Intertemporal b Discount and Discount Rates c Present Value X IntroductiontoMutations Current Lecture 2 4 1 21 Relaxing our No Scarcity Assumption o Decision Rule Under Scarcity o Constrained Optimization Problem maximizing utility in the face of a scarcity by balancing at the margin Relaxing our No Production Necessary Assumption o How do we get the most utility out of our resources o Eventually diminishing marginal production as you increase one input in a production process initially the successive units of that increasing input generate more and more output but eventually and inevitably each successive unit of that input beings to exhibit These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute decreasing marginal productivity each unit of input makes successively less and less to output o o o Decision rule must capture a two step thought process to optimize resource use How productive are we at making the various things we desire Production How much do we desire each of these things Preferences Value from the Marginal Product V Added utility from using successive units of a resource V combines what we know about our productivity and our preferences by connecting marginal product MP and marginal utility MU Value Marginal Product and Optimization the General Decision Rule Example Studying first you get more and more productive because your brain starts slowly then you get on a roll Your marginal productivity is increasing Then things happen to reduce your marginal productivity it gets hard you get tired In order to maximize utility we set V1 V2 V3 Vn V includes information about the MP and MU of the individual This allows us to predict how one will respond to changes in ones set of resource constraints opportunity set preferences or productivity Relaxing our No Future Assumption o Addressing Time When we include that reality of a future to consider our choices become complex because they are intertemporal o Choices have consequences across time Most of the choices you make especially big ones are going to be realized as a flow of satisfaction that go into your future In order to make a choice one must compare options Different choices different flows of utility Discounting the Future Discount to diminish the value o o Ceteris Paribus people don t want to wait they want their utility sooner than later Discount Rates Waiting premium the price paid for waiting or one s discount rate One s discount rate measures the degree to which one would discount the future which represents how much you would have to be compensated for waiting A person s discount rate is just a reflection of that person s attitude toward waiting toward the future When your discount rate changes your choices change Present Value With a discount rate one can take those future flows of utility and measure their present value Present value is the value of those future utilities all telescoped back into a single value now o Can directly compare an intertemporal choices now and make a rational choice What does building in the future do to our decision rule PV1 PV2 PV3 PVn V productivity and preferences PV present value