Ch4-slides

# Ch4-slides - Chapter Four Consumer Choice Chapter Four...

This preview shows pages 1–13. Sign up to view the full content.

Consumer Choice Chapter Four Chapter Four

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
Chapter Four Overview 1. Motivation 2. The Budget Constraint 3. Consumer Choice 4. Duality 5. Some Applications 6. Revealed Preference 1. Motivation 2. The Budget Constraint 3. Consumer Choice 4. Duality 5. Some Applications 6. Revealed Preference Chapter Four
Consumer Expenditures, US, 2001 Yearly After Tax Income: \$42,362 Yearly Total Expenditures: \$40,900 Allocation of Spending Food \$5,904 Housing \$12,248 Transportation \$8,672 Health care \$2,239 Entertainment \$1,958 Chapter Four Motivation

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
• Price of x: P x ; Price of y: P y • Income: I Total expenditure on basket (X,Y): P x X + P y Y Assume only two goods available: X and Y The Basket is Affordable if total expenditure does not exceed total Income: P X X + P Y Y I P X X + P Y Y I Chapter Four The Budget Constraint
P x X + P y Y = I Y = I/P y – (P x /P y )X Budget Set: • The set of baskets that are affordable Budget Constraint: • The set of baskets that the consumer may purchase given the limits of the available income. Budget Line: • The set of baskets that one can purchase when spending all available income. Chapter Four Key Definitions

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
Two goods available: X and Y I = \$10 P x = \$1 P y = \$2 Budget Line 1: 1X + 2Y = 10 Or Y = 5 – X/2 Budget Line 1: 1X + 2Y = 10 Or Y = 5 – X/2 Chapter Four A Budget Constraint Example
I/P X = 10 Y X A C B I/P Y = 5 Budget line = BL 1 -P X /P Y = -1/2 If the price of X rises, the budget line gets steeper and the horizontal intercept shifts in If the price of X falls, the budget line gets flatter and the horizontal intercept shifts out Chapter Four A Budget Constraint Example

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
Y X 10 5 BL 1 6 12 BL 2 I = \$12 P X = \$1 P Y = \$2 Y = 6 - X/2 …. BL 2 If the price of X rises, the budget line gets steeper and the horizontal intercept shifts in If the price of X falls, the budget line gets flatter and the horizontal intercept shifts out Shift of a budget line Shift of a budget line Chapter Four A Budget Constraint Example
Y X 5 6 I = \$10 P X = \$1 P Y = \$3 Y = 3.33 - X/3 …. BL 2 BL 1 BL 2 3.33 10 If the price of X rises, the budget line gets steeper and the horizontal intercept shifts in If the price of X falls, the budget line gets flatter and the horizontal intercept shifts out Chapter Four Rotation of a budget line Rotation of a budget line A Budget Constraint Example

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
Consumer’s Problem: Max U(X,Y) (X,Y) Subject to: P x X + P y Y < I Consumer’s Problem: Max U(X,Y) (X,Y) Subject to: P x X + P y Y < I Chapter Four Consumer Choice Assume: Î Only non-negative quantities Î "Rational” choice: The consumer chooses the basket that maximizes his satisfaction given the constraint that his budget imposes.

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
Interior Optimum: The optimal consumption basket is at a point where the indifference curve is just tangent to the budget line.
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### Page1 / 43

Ch4-slides - Chapter Four Consumer Choice Chapter Four...

This preview shows document pages 1 - 13. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online