101A_lec10 - Economics 101A (Lecture 10) Stefano DellaVigna...

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Economics 101A (Lecture 10) Stefano DellaVigna February 19, 2009
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Outline 1. Do utility functions exist? 2. Application 1: Labor Supply 3. Application 2: Intertemporal choice
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1 Do utility functions exist? Preferences and utilities are theoretical objects Many di f erent ways to write them How do we tie them to the world? Use actual choices — revealed preferences approach
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Typical economists’ approach. Compromise of: realism simplicity Assume a class of utility functions (CES, Cobb-Douglas. ..) with free parameters Estimate the parameters using the data
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2 Labor Supply Nicholson Ch. 16, pp. 573-581 (477—484, 9th) Labor supply decision: how much to work in a day. Goods: consumption good c, hours worked h Price of good p, hourly wage w Consumer spends 24 h = l hours in units of leisure Utilify function: u ( c, l )
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Budget constraint? Income of consumer: M + wh = M + w (24 l ) Budget constraint: pc M + w (24 l ) or pc + wl M +24 w Notice: leisure l is a consumption good with price w. Why? General category:
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101A_lec10 - Economics 101A (Lecture 10) Stefano DellaVigna...

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