lecture04

# lecture04 - CONSUMER CHOICE"Utility Maximization Subject to...

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CONSUMER CHOICE: Utility Maximization Subject to a Budget Constraint” or “Budget Line Meets Indifference Curves” Rational consumer approach: highest utility money can buy! Max X,Y U(X,Y) subject to: p X *X + p Y *Y < Solution: Move out to highest indifference curve without breaking the budget Optimum bundle where an indifference curve is tangent to budget line: MRS = p X / p Y Results presumes both goods are purchased I

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CONSUMER CHOICE Recall that: MRS = - dY /dX = MUX / MUY slope of BL = dY /dX = - p X /p Y Substituting, we get a condition for the optimum bundle: MU X / MU Y = p X /p Y Interpreting the Optimum Condition Rearrange optimum condition: MU X / p X = MU Y /p Y MU X (1/p X ) gives the utility of last dollar spent on music Last dollar spent on music increases utility the same amount as the last dollar spent on movies!
CONSUMER CHOICE (Cont’d) Corner Solution “MRS = price ratio” does not hold anywhere along budget line for

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## This note was uploaded on 08/01/2008 for the course ECON 100A taught by Professor Woroch during the Spring '08 term at Berkeley.

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lecture04 - CONSUMER CHOICE"Utility Maximization Subject to...

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