Complete Study Guide: Consumer Theory (Based on Varian Intermediate Micro)

Comprehensive Study Guide: Consumer
Theory
Based on Intermediate Microeconomics by Hal R. Varian




Contents

1 Introduction 3

2 The Budget Constraint (Chapter 2) 3
2.1 The Budget Line . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.2 Key Concepts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.3 Comparative Statics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.4 The Numeraire . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

3 Preferences (Chapter 3) 4
3.1 Axioms of Rational Preferences . . . . . . . . . . . . . . . . . . . . . . . 4
3.2 Indifference Curves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
3.3 Well-Behaved Preferences . . . . . . . . . . . . . . . . . . . . . . . . . . 4
3.4 Marginal Rate of Substitution (MRS) . . . . . . . . . . . . . . . . . . . . 5

4 Utility (Chapter 4) 5
4.1 Fundamental Concepts . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
4.2 Relationship between MRS and Marginal Utility . . . . . . . . . . . . . . 5
4.3 Classic Utility Functions Examples . . . . . . . . . . . . . . . . . . . . . 5
4.3.1 1. Cobb-Douglas (Standard Preferences) . . . . . . . . . . . . . . 5
4.3.2 2. Perfect Substitutes . . . . . . . . . . . . . . . . . . . . . . . . . 6
4.3.3 3. Perfect Complements . . . . . . . . . . . . . . . . . . . . . . . 6
4.3.4 4. Quasilinear Preferences . . . . . . . . . . . . . . . . . . . . . . 6

5 Optimal Choice (Chapter 5) 6
5.1 Interior Solution (Tangency Condition) . . . . . . . . . . . . . . . . . . . 7
5.2 Corner Solutions (Boundary Optima) . . . . . . . . . . . . . . . . . . . . 7
5.3 Lagrange Method (For Advanced Calculus) . . . . . . . . . . . . . . . . . 7

6 Demand (Chapter 6) 8
6.1 Classification of Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
6.1.1 Relative to Income (Engel Curve) . . . . . . . . . . . . . . . . . . 8
6.1.2 Relative to Own Price (Demand Curve) . . . . . . . . . . . . . . 8




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, Intermediate Microeconomics Study Guide: Consumer Theory


7 The Slutsky Equation (Chapter 8) 8
7.1 Substitution Effect (∆xs ) . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
7.2 Income Effect (∆xn ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

8 Summary of Cobb-Douglas Demand Formulas 9

9 Conclusion 9




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