Ch5_class_09

Ch5_class_09 - Chapter Five Choice Economic Rationality The...

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Chapter Five Choice
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Economic Rationality The principal behavioral postulate is that a decisionmaker chooses its most preferred alternative from those available to it. The available choices constitute the choice set. How is the most preferred bundle in the choice set located?
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Choice Problem Given utility function given prices p 1 , p 2 , and income m, the consumer chooses a bundle to maximize subject to budget constraint: Max subject to U(x 1 ,x 2 ), U(x 1 ,x 2 ) p 1 x 1 + p 2 x 2 = m. U(x 1 ,x 2 ) p 1 x 1 + p 2 x 2 = m
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Optimal Choice Affordable bundles x 1 x 2 More preferred bundles
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Optimal Choice x 1 x 2 x 1 * x 2 * (x 1 *,x 2 *) is the most preferred affordable bundle. Intuition?
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Ordinary Demand The most preferred affordable bundle is called the consumer’s ORDINARY DEMAND at the given prices and income. Ordinary demands for goods will be denoted by x 1 *(p 1 ,p 2 ,m) and x 2 *(p 1 ,p 2 ,m).
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When x 1 * > 0 and x 2 * > 0, the demanded bundle is INTERIOR . If buying (x
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Ch5_class_09 - Chapter Five Choice Economic Rationality The...

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