cnc Consumer THEORY @ # Oodtnol Vail Analy Sig Bohn Richond Hicks and R.Ge.D Allen. + eno. ere bo tha ordinal ubilty Obpooach) The made stanipioank contoibution t ©. y axfomebie. foundation. of. modemn ulility thooswy eoere devel sped omen othow by Kenneth Anno, boeaald Debora and Koopman The madeom. ull theaoug begins by assuming Hateonaumen 4 na penrence over bunket/ op. goods Consumption. bundle ts oLesting of tre omourt Of each of the eommodilves eosumed by a Consumen (This approach assumer Chak consumer chooses all qoodetmuilleneowrly rockon Seon selacking one, commodily otlen gmathian ar fn ve aandinal Let ws define Ure con sumplion burdluby ovecdon Xeshine, K= XK x%05%a,---.-. >%n), Whene oes fs Be comount of the qood te tke bundle ond fs non regolive .Let x’ x" stands Poo the ” i shakomenk Unat the. consumer Dayeds Wad dt lant angeol anx! This chmbel ts kno reas ae won 07 the pactenenca indalfnenca, se lotin . BD mY x” and xB x! thar : Bx then xD %” GOT RPK but vot wbx! Haan x’ fm", The, oundlen fr os, AW Qener preferences ollou the eonsuman te nant, dPpenonk den of poupenenceon destetbilily.D Bpement consumers cL have dipenenk- systems op boopenences.We assume erence aardanins Shave, cartitin. Camman. frochen res. Noes eve Lire cankain. assumptions ashich gives the desined propent! Censumen’s boalenence oodering. | ane f Garb irenor t- Ren omy %’and *", ofthen x’'bx’ A'S oobecth, This assumblion says toe aonsumen ts ableto expnoschis sDenensen boelusaan omy bain of aoneumption. brdler.Tn allen orende, Yaena ane no ‘hole’ fr Ya poufenence. cordenfag. Oden omy bundle. X' even other bundle K' com be fuk into one of Uwe sels - @ The sek of bundlen profenned bo x’ C Belten setd 1 OSckop bundlen tedéppenent to x’ C Indippenence sek) @Sd-P bundle bo whi *'% paorned Corcese seb.a * ‘ fot , ' % 4 Goons & Ie arene eae Feel x" Tp X'S and mse . Aton. xb” This fs the consistency sragtitnoment oP thaeo” ae Oe Ru 9 Te tmplies thak no bundle can. loal ong Yo mana than. one Endl ppenemen eck Suppose. 7/2" 40 tak 9%" belong, be the. tnd Ppenronk seb of: Again. XNA Ril so those K” oalongs to the fndipprrenca get oP IAD and 9!” 4 ose. frdipgenent ten nx” then thone's no broblem, Buk ih Mb xe’ | then. x” must be tntue tndiPenenos sets thal oPm’and ¥% wshial mfolots tke assumplion oP toonsitfiity .Henae qhren this assumption an belong tamane thom one indippenence set Thuy ottivity assumption implies that tndippenence set har ne intersection ; ian So Fo al X! Om B. odio of. Nop -Soltatior, Doyinamce sor Monotontall fm ae consumption. sD xD%" then. Kb x bees oconsumbiion buodle. 3 allt be pewpesuad te 7” 7 Comlains mone of ak Learnt ene goed and ro lor ep omy other te. $2 DK Ths assumption stotes x 6 thabtonsumeny prrepens moow.o). adh commodity te lex» CMIGD. Tes assumbfon establishes the sulabtenshifp bekwean. Yue quanllies ob acods fro bundle ond. ths Hace tr the poupencner crderinge This ' wcatolfom brastipposes thot none oP the goods %e Bod’and the -good fe. he ts notover supp oie azo fg maven sotiatid Sn ory g hon, Car modity “This assumblon.does not held for bad aenmo dys fon eq poltukion.- Ay Pockom 9 Corbiautly The qaraph epom. tndigperence set to. Aico ge, ozduca tha OmountoP. one geod Choos conbinecowy 31 te. Yo even srcli Wks naduatfon be) Wwe con Hind a ecarnesbbonding: Brennonetrtha othen good eotiah WL exactly eombalnsal the eonsumen te. Leave. VY tf on. Me some indippercnae sunface. Tals ooctsm fs violatzd fn eose of Luxteogrophia Cordening.. 5. Stoiot Comets Assumbtion Coven ony consumption. bundle. 29 ths boelren selcts stovatly Qonver. ‘The bellen ack of! fs the sel-opall bundlen eshich Ue above: indijpenenttl 2 sek panning Uorough 2. Ths the consumer clays poser oomchow of He aensuomption,dle whol ane dippenent to eockother to either one oP bhane bundles, for reer, Wnconsumen fprufens ovenage bundlar to exkneme. Rattan San howfng, agorook doal of one good and o bile Lik op other Lae Gonsumen prapers to have madonaltt amount oP bolh. Statck eonvereitty outer cub the posstlally op Ze’ ” Cutting ooed.s.TP Wray did then oseis erould beanme. exkentians of PC's, eabioh one Liman. This fs Praonatstent coflh stotel- conventy. He Indipperence. Cuvwe fa twa Commodity ase Unden the above. assumbefons cue con desenthe tha praperencer of & aansurnen fn. ase of two commaditfes grebhtealy indigfeneran tunves (Ay tndfjpenence cunve, ts a Leu of points fn the commodity spree cuah Aak oe points on it Gre. equi: prazened by ta. censure: AUbermotively on TC ts daphred as the sek of alr commodity bundles C6 5% s2—5--- 5%) that Satishy UR Ky» ----s Xn) = e, crema ye, = (eh srel ) Hae Oh, 22) and so on. © Brcberttes op 2G 5- W Sy dBlewence, eurves oo. vagetively slobed t= Lelrthe Ubileby Jeena on. of a congumen is UE YOC>%p) Then by depinittion oP fri ‘py enenag Auave’ + ee ete eet diffenentiaL we get, dua Bx 4484 dey 29 oy doce Be on, 4%. 2 MY du 3a dey MUS Om Using the oxtom ef monotontally we ean say MU »MU,>0, 0 o% negative ‘This proves thak 105 Lures megatiivels sloped. ‘ When Br consume gets mone op oon Commodity his ually Mevel oth therease FP the emaunk oP thd abhen cownmnodi Sanwitns soy Henec the ubtlity level aan samodn Constant only, colar Fra eonsumen sonnififed ena Commodity while, aonsuncing mana a? Hha obon . GH) 20s ore, csnyer tote colefore: Com sumerts 10, doe: converte he origin tPond onlig tp tha Las of dimindsling. MRS hold. The manginot snott of substttubfon. oP goed 4 foo qood 2 CMRS,2) along on. indipenence rae Ovo Ph qood 2 thak must be saanttized to obtain one | additional untk op. qood £, sxymbolioally sMRS,4 = ~ Se =u wn, | | MRS fs the obsolut value oP tne clehe oP 10.We lore ieap olen :ion 2 skeet convex den absolute valucop the slope of DC dearcaron | OD moow ond moot aved 1 fs consumed «This means that Hie ensue i men wens to socsiplpad lors ond fer» amount op goed 2 togetoneAn the corigin cabal tn. tuo th a 7 a thal ® tha lacy of diminishing MRs hald thisn ths 24 hemes stalotly converte the_ootiyin. We lau the slope op- tha Ne Le Poa cbter x , Onwvextty absoluke value. ofthe Slope af Te. ahould Sell ox» 2, thenenses, Alkermattvely algehofa value the slope of PC ahould ntcote.d (3283), de Gdx)70. We. ‘ econ coon, He (G3) = (NR6 5) =~ ACMRSi2) | Now (es ox Tm (EES) postive tp d Cas ve Te hos te be dint a SEED nagabive,, This rears MRS GB Jiro Tels carne saat nbenzeak ena obhent- We noco Hak dierent properties of Aensumans bowfenence Ane ebbispied struuttoneountiy Lee. thay ana consistent euft each other Bult tai tuo TC eut Gr touch cock otbervthen ft ean . be. chown Ural axfemep. manatontethy ond Noe Looney coftl not held shrulbomesusly. 6 oo Subbose kwo Endtfenenca eunven Lond I No Entensect at petrt A, So that A belongs to bot. the 2A. Now eve take Bon Te I so thak consumer fs Indippenence hekuean Aand B. Again we take another point @ on 20 T sfuatid venkicolly below G. Prom He canstowalton. £ fs clean that consuments tndizponent- bekwean A omd @. Henar. Povern Waa. ovtiom of fmomalbivi by 90 Cam scr Haale consumer eXW be. trdlpperant belsiean Gand @. Suk bude B Contoiry moow oP And cammodiby than bundla. CCBut both dankains some amount of Pinst eammadity.Thersfare prom Ha axiom ap. tha. monotonicity We ean soig Hrok con avMan estll poser poem Brol Tuusthe. oxtom op sromotendetly and tre oxfor of tnanetitutly Lead to eontnadickeous conclustons cvouk Ha Consumars parcfenence $0 the bee axioms Con nat hold ehmubkaneously Henaa ean Enittal assumption thet TC's con. intersect wan wang, Tov DC’s aom not Pritensecton tou cork oben + ©) Higher D0, nobaosemts higher. devel oF weibhy t By ure oscom op menstonioity ee ean show thar higher 1¢ sepoesent higher tevelAmount of Asteommadily cond Same am commadi Pe op ullily Constden the Jlowng, guneiove 20's 5 We taka o point A on TC I este contains Cand %s omaunk op. Ast ond Endeommodity eresbeabvely. Now take a point Bon I@ I cehicl eontatas xP Chie. 3) Se bundle B contains more ammount oP 4st commodity. as XP >o4, bub same ond Tl enedrawn, ount-op. 2nd AMON oF And commodity extkh oaspeat bo bundle Aso the ovctorn oP mmeonsloniett : 5 ts onty, fot on TUT, ee mote thok TCT ts drawn higher too by M,Prond cwspecth mon -negotivl aensumen’s aposcdable consumbtio eenstnaint fn equality, doom te, FM +h =M Oy FX = M-RX, os, % = Moh Fe on, x 2M _ Ree 2 =p a On, Roe M _ 1 2 Py So, slobe oP be budge Une. bs & 4 JP 22-0 tron X= Bond there C1) 4 Une (negalively sloped) ashose slope 5 nuttio ap the porlees oP two commodtifes . In Hredio. gon AG Line mopresents budger Linc evhose equsition fs cpoasented by eqyetion. (1), TP the tre \ 1 fier M> CRM %) Hen | 1 # Budogt Une Consumers clotltty budgek Line which saparesent attainable combinations of different aomrmodities Let ur denote consumans inaama. and poten of bw commodities ; Budget consimaia op He consumo is wpswsented by FR%TR 2 Me) R es wert) * bn 4H Enulltoodumoe tre consunent- Equllibadum ts sbate Esher the ecenomic agerls Hat no tntention tochonge fk. Sines. the olejective of the consume Ceconomic agent's to maximice his ubllikys be evil have no trtentfon. te change Me ormount of. purchase. cohen his utility ts mootimixed. Hene MN fs budgek Line af the eensuen. ALL points Lhe Rand ancequolly costly 40 the eonsumen + Among there. combina. ™ - Gonee consumer CW slack hour posthioutan corniotmabion. extrone his ubility te moseimum. We know thak highen ulflity Jevel fs ozprusented by ohighen find’ pPenence curve. Henee. the consi rar estlLkouy to oolelve hightsk possthle 1¢ ouomabiing on the budget Lina. This ts posstbla ashen the budget tina's Komgent to one of thene Indijfenenca curves Thing hapbers ak pat P, ony otkan Polat onthe budgek Ling, MN ceftl Liz on ao Lewor Endiffenence thos thak pass? thorough P. Point P MhanoPoncoroporesens” epee peel etna dom. qek Hoe highantpanstile uitltty.rience P epoasents Ure Me Kiam Hae Can surnor pagan. UMLiy oy spending, oma unit Of rromsit on res han on % ! lhe ertll punchare mane% ond lass x2. Sfmilanty when Mpc Mur Ane consuman etl punchana mmnert, omd Lars. As a easudeop. euch substttitton. leebwenn %iand Xp tre aoneumenesil annive at re ” equblientum devel, where MULe Mye 2 MobhemetioeLuy consumens equilibrdum eam be analysed an foUlows, Problam of 2 consumes is to maximize. Mose U= U(% 5% 25 Lubjeat bo, M= RXMrt Xa - This foo constrain mosimizor —tion problem hich eon be solved by Jogoonge mulliplizn method. We con cunite tha aompostte prnekion - Le ubesread+ \ LA - PX aXe] ohare A fs yet undetermined Lagrange muttiplion. Fisk onder condition oa nesessorg Qondition, foo maximization. one— SLL» Gee. Bx, = Be, “AR =O : eo dL. pU ypao-------@ BL = BY — aR =0 Bea MRR OT we Dividing. (D ond GH) we gee Qa 24 = BR Du PR re 2 Sitbotium. The This te the plnsk onda eanditfon feo consumer's ofr To eeaard pxish condition. of uit mood mization. Coonstoaink mmoaximigakion) aan be cwoilterr a> — Uo Us, -F VAl=lu, us -R] 28° “Bom OO 2 = [24ini- URUet 1 0™ Substituling F = Ee ond Fake Povo pinek cordan anrcitton cy g rudltblybng AX use. got - / D242 Un =U, U-U.U2J>0. This wagons thal MRSin fs diminishing ou rane and mone of dad commodity. f ts aubstfluked fon Ant eommodfly te Th othin woods TO mute strfotly conver be the oka in Loe. dy So. Noes, considen a situation whore 2ad esc. aondion fs sattapfed buk Ast codon condition. Wiolabed . This meat happen ip De fs conver. but en eohore mone sto on Less sbeab than ba. ek Line. Thithis ease we ufll get canner eolubfon eotane He consumes exh purchara. ony onecommadiy Bn Hye equilibsdum « Xe e uy ee ty uy us 7 % +6 £ MUS PL 4D aU, OE MY. MU, 3 My, Mu. ots es : : > Lek us aonsiden a stluctin ewhone $.0.0 Patt, to held: Lee un consider OH Case ethene the melovant 26 containra Uneasr sagdment that eofnside enflh a oation oP the budget ltrs. cn this dftuatfon. we will get- mulitple movelnuim. Hen BO. f3 scbisfled ok eveu potnt ep the Uncearr sogemant. But on the Lean Sagemente se <0 wtdah moonsl HI= 0 . Thus a smoodimization bs achelved in tuis cose. even thforgh cecond ondn supatenk condition An | is sfolabzd .Tn oak, tn Ute dlluaklon. ultlély 7 Pumelion ts qund-contave oathan thon a skeviok Ly quest eeneave., = © Statemanks Show tock canton f camattlion fs neas ssary luknat oe sutziclent: fone~ Tangency pelnt Cy fr the diagnam fs EnPerntos. te nontangeneyt point D.Now ameng the thouc bundler A,B,¢ whore tangenay eondilfon. ts Pullipiald Aand B One obimal Thies means fengenoy condition A fs neaessany bub not euppictent F# adiffeneraa ousve fon bad thas A bad fs o commodily tolnfcl the consumer deca not Like e.g, pollution: Subhose. Leansume likes te have an oben baleony in hig houne buk-hedislikes dust fn the baleeny + So dust fs x bad ehh Sized} the balcony. fs od The amount CF dust fr thls example francases wth tee af’ OP the. boloony «TP ose. plot sfzo oP tha baleonpon the heotronkal rds pDunt bad) "t and amount oP duston tka vertical, oats thon. : Pe's wo slope Upurand to tho euight, Thediswation oP Pre ng pow Penenee. os Cound Uredfocatlon op beens balan size. (good) .We. know tha oe | Siebe ef TC Fe ae 1Tn thks eflucttion 4h2s fs a cl : ue bo Mu d eta Ne eee Now &2 we trinoduce Hre bokne é | -0% ble of dtntotese Mugen good ond an See east Tnereaning mang disudflity Pom bad thon TC utll be goneave. toanands the pood axle an shoton fn the dla gram MRS dean2adeS ous inane andi amataned is substftuted for bad. Here, She of Te = —Filgetd | Foo bod MUsag fo negetiveond” Seer good Mgoay f postive, Henea., Slobe oP. Te = Fi fs posthive . | oP we mensume bod otong the hoodeontal ods ond good verlical cos thon the slobe of 20 oll again be. postktve. but He dfsoatian op fnereasing. pouferene oll) be upestnd towards te doeation op tneneased good buk the euswatiue OP TC wil be conver along te bad cocks Leas mane ond mone bad ts aubsttlubed Jar qoed MRS ceaneases, This means He slohe op- TC tnancores (Ff or mene lod fs substituted foo | GP mrorclomichty an MIB ts vPolaked Mace. dust Clog) | is conse not betten . We can aloo dacs TO sake, | 1