Flashcards : Consumer Choice and Utility Theory — 20 cartes

Mathematical representation of preferences, assigning real numbers.

Ensure preferences can be represented by a utility function.

Evaluate risky prospects using probability-weighted utility.

Maximum amount a consumer is willing to pay for an additional unit.

Additional utility from consuming one more unit.

U(q, t) = V(q) + t, separating good and money.

t + pq = I, total expenditure equals income.

Marginal utility per dollar equalized across goods.

Decreasing marginal utility causes inverse price-quantity relationship.

Responsiveness of demand to price changes.

Greater than 1; demand is sensitive to price changes.

Less than 1; demand is less responsive to price changes.

Demand for substitute increases, shifting demand right.

Consumers can always compare and rank options.

Preferences are consistent: A>B and B>C implies A>C.

Evaluate risky options via probability-weighted utility.

MU₁ / MU₂, rate of substituting goods at constant utility.

Increases with income.

Decreases as income rises.

Substitutes: demand rises when substitute's price rises; complements: demand falls.