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OSU ECON 4001.01 - Revealed Preference

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Econ 4001 1st Edition Lecture 5Outline of Last Lecture II. Where demand comes fromIII. What the goal of consumption isIV. Market Baskets and Consumptiona. Indifference CurvesV. Marginal Rate of Substitutiona. Perfect Substitutes and ComplementsVI. Budgets and Limited ResourcesVII. Budget Linesa. Impact of change on the budgetb. Combining indifference curves and budget linesVIII. Maximizing Consumer SatisfactionOutline of Current Lecture IX. Companies Production Based on Consumer PreferencesX. Revealed PreferenceXI. Marginal Utility and the Equalization PrincipleXII. Condition for Equal Marginal Principle to HoldXIII. Rationing Current Lecture- Companies Production is Based off the Appeal to Different Consumer Preferenceso Example: Kellogg has 23 different cerealso Procter and Gamble have 7 different soapso Firms may to try to make a compromise product that attributes that will appeal to both groupso Firms may decide to market products to only one group of consumers- Revealed Preferenceo If we can observe consumer choices, we can learn about preferenceso If a consumer choses basket A when basket B is affordable, we know A is preferred to B for this consumero The point of highest satisfaction for consumers is where the budget line is tangent to the indifference curve- Marginal Utility and the Equalization PrincipleThese 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.o Utility is an assigned value of happiness from consumption (recall utility is constant along an indifference curve)o Moving along a curve, increase in utility from adding more of good A must balance the loss of utility from taking away good Bo At consumer’s optimal consumption point (tangency of budget line and highest indifference curve): Marginal rate of substitution equals the price ration betweenthe goods- Conditions for Equal Marginal Principle to Hold:o Consumers must be able to purchase desired quantities of goods at market priceso Preferences must be smooth- Rationingo Rationing occurs when consumers cannot purchase freely o Example: if the government holds the gas price at $1 and limits buyers to 2000 gallons; results in consumer worse off than unlimited gasoline that could be bought at the $1.00 priceo Rationing forces consumers to a less satisfactory


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