Do you want BuboFlash to help you learning these things? Or do you want to add or correct something? Click here to log in or create user.



#cfa #cfa-level-1 #economics #microeconomics #reading-14-demand-and-supply-analysis-consumer-demand #section-3-utility-theory #study-session-4
To determine our consumer’s preferences, we present a choice between bundle a and bundle a′, which contains more bread but less wine than a.

We need to ask the consumer which one he prefers. If he prefers a′, then we would remove a little bread and ask again. If he strictly prefers a, then we would add a little bread, and so on, until we could find just the right combination that the new bundle a′ would be equally satisfying (indifferent) to our consumer as bundle a.

We would then choose a bundle, say a′′, that contains more wine and less bread than bundle a, and we would again adjust the goods until they are indifferent.

By continuing to choose bundles and make adjustments, it would be possible to identify all possible bundles such that the consumer is just indifferent among each of them and bundle a.

Such a set of points is represented in Exhibit 2, where the indifference curve through point a represents that set of bundles. Notice that the “preferred-to-bundle-a” set has expanded to include all bundles that lie in the region above and to the right of the indifference curve. Correspondingly, the “dominated-by-bundle-a” set has expanded to include all bundles that lie in the region below and to the left of the indifference curve.
If you want to change selection, open document below and click on "Move attachment"

3. UTILITY THEORY: MODELING PREFERENCES AND TASTES
Note: A given bundle of two goods is represented as a single point, a, in the two-dimensional graph. Non-satiation allows us to rank-order many, but not all, other bundles, relative to a, leaving some questions unanswered. <span>To determine our consumer’s preferences, suppose we present a choice between bundle a and some bundle a′, which contains more bread but less wine than a. Non-satiation is not helpful to us in this case, so we need to ask the consumer which he prefers. If he strictly prefers a′, then we would remove a little bread and ask again. If he strictly prefers a, then we would add a little bread, and so on. Finally, after a series of adjustments, we could find just the right combination of bread and wine such that the new bundle a′ would be equally satisfying to our consumer as bundle a. That is to say, our consumer would be indifferent between consuming bundle a or bundle a′. We would then choose a bundle, say a′′, that contains more wine and less bread than bundle a, and we would again adjust the goods such that the consumer is once again indifferent between bundle a and bundle a′′. By continuing to choose bundles and make adjustments, it would be possible to identify all possible bundles such that the consumer is just indifferent among each of them and bundle a. Such a set of points is represented in Exhibit 2, where the indifference curve through point a represents that set of bundles. Notice that the “preferred-to-bundle-a” set has expanded to include all bundles that lie in the region above and to the right of the indifference curve. Correspondingly, the “dominated-by-bundle-a” set has expanded to include all bundles that lie in the region below and to the left of the indifference curve. Exhibit 2. An Indifference Curve Note: An indifference curve shows all combinations of two goods such that the consumer is indifferent between them.


Summary

statusnot read reprioritisations
last reprioritisation on suggested re-reading day
started reading on finished reading on

Details


Discussion

Do you want to join discussion? Click here to log in or create user.