Econ 6 - 1 Corner Solution of Optimization 1 14.01...

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Cite as: Chia-Hui Chen, course materials for 14.01 Principles of Microeconomics, Fall 2007. MIT OpenCourseWare (http://ocw.mit.edu), Massachusetts Institute of Technology. Downloaded on [DD Month YYYY]. 1 1 Corner Solution of Optimization 14.01 Principles of Microeconomics, Fall 2007 Chia-Hui Chen September 17, 2007 Lecture 6 Optimization, Revealed Preference, and Deriving Individual Demand Outline 1. Chap 3: Corner Solution of Optimization 2. Chap 3: Revealed Preference 3. Chap 4: Deriving Individual Demand, Engle Curve 1 Corner Solution of Optimization When we have an interior solution, P x U x = P y U y must be satis±ed. However, sometimes a consumer gets highest utility level when x = 0 or y = 0. If that’s the case, we have corner solutions, and P x U x = , P y U y as shown in Figure 1. In Figure 1, because people cannot consume negative amounts of goods (bundle A), their best choice is to consume bundle B, so the quantity of y consumed is zero. Conditions for corner solutions: U x P x MRS = > when y = 0 . U y P y U x P x MRS = < when x = 0 . U y P y Example (An example of consumer’s problem) . The parameters are P x = 1 , P y = 1 ,
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as: Chia-Hui Chen, course materials for 14.01 Principles of Microeconomics, Fall 2007. MIT OpenCourseWare (http://ocw.mit.edu), Massachusetts
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This note was uploaded on 04/26/2009 for the course ECON MICRO taught by Professor Chen during the Spring '09 term at MIT.

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Econ 6 - 1 Corner Solution of Optimization 1 14.01...

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