Consumer Choice and Utility Theory

📋 Course Outline

1. Consumer Utility Maximization
2. Marginal Utility and Demand
3. Utility Measurement and Indifference
4. Budget Constraints and Optimization
5. Law of Demand and Elasticity
6. Price Elasticity of Demand
7. Types of Goods and Income Effects
8. Substitutes and Complements
9. Rational Decision-Making Assumptions
10. Expected Utility Theory

📖 1. Consumer Utility Maximization

🔑 Key Concepts & Definitions

• Utility Function (von Neumann & Morgenstern, 1944): A mathematical representation of a consumer’s preferences, assigning a real number to each option such that higher numbers indicate more preferred options, enabling analysis of choice behavior.

• Completeness and Transitivity (Arrow, 1951): Assumptions that preferences are complete (for any two options, the consumer can state a preference or indifference) and transitive (if A is preferred to B, and B to C, then A is preferred to C), ensuring preferences can be represented by a utility function.

• Expected Utility Theory (Bernoulli, 1738): A model where consumers maximize the expected utility of uncertain outcomes, capturing the idea that utility, not monetary value, guides decision-making under risk.

• Willingness-to-Pay (WTP): The maximum amount a consumer is willing to pay for an additional unit of a good, interpreted as the marginal utility of that good in quasilinear utility models.