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Eco204

University of Toronto
Department of Economics
ECO 204
2011 - 2012
Sayed Ajaz Hussain
Lecture 3

© Sayed Ajaz Hussain, Department of Economics, University of Toronto, STG

1

Lectures 1 and 2 ..
Method for solving unconstrained optimization: max ��
��

The Envelope Theorem
Lagrangian method for solving equality constrained optimization: max �� . ��. �� = ��
��

Kuhn-Tucker method for solving inequality constrained optimization: max �� . ��. �� ≤ ��
��

See ECO 204 chapter 1 or come talk to us in office hours
Feedback? economics204@gmail.com

© Sayed Ajaz Hussain, Department of Economics
University of Toronto, STG

2

Today: Consumer Theory
Preference relations and “Rational” preferences
Commodities and Consumption set
Felicity
Utility functions

Positive monotonic transformation
Indifference Curves
Marginal Rate of Substitution
Feedback? economics204@gmail.com

© Sayed Ajaz Hussain, Department of Economics
University of Toronto, STG

3

Some Applications of Consumer Theory in ECO 204
Consumer Choice
Consumer Preferences and Income → Consumer Demand Function
Consumer Demand Function → Consumer Preferences → Welfare analysis
Finance
Portfolio allocation between a risk free asset and risky assets
Inter-temporal savings
Marketing
Forming market segments
Advertising
Introducing and/or changing product attributes
Public Policy
Ban or curb harmful consumption of “harmful” goods?
How to promote higher birth rates?
Feedback? economics204@gmail.com

© Sayed Ajaz Hussain, Department of Economics
University of Toronto, STG

4

Economics: a Social Science
A few words about economic models: assumptions and methodology

Plausible
Assumptions

Feedback? economics204@gmail.com

Model and Generate
Testable Predictions

© Sayed Ajaz Hussain, Department of Economics
University of Toronto, STG

Test Model

5

Modeling a Consumer’s Decision Problem
Chooses from set of mutually

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