# ch04 - Chapter 4 UTILITY MAXIMIZATION AND CHOICE 1 Our...

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1 Chapter 4 UTILITY MAXIMIZATION AND CHOICE

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2 Our Consumption Choices Suppose that each month we have a stipend of 750 \$. What can we buy with this money? Of all the possible choices, what are we actually buying?
3 What can we buy with this money? Pay the rent, 250 \$. Food: Whole Food, 300 \$ Clothing 50 \$ Gasoline, 40 \$ Movies and Popcorn, 60 \$ CD’s, 50 \$ Tennis racket ? Pay the cable TV?

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4 What can we buy with this money? Pay the rent, 150 \$. Food: Ralph’s, 150 \$ Clothing 40 \$ Gasoline, 80 \$ Movies and Popcorn, 60 \$ CD’s, 20 \$ Tennis racket 169 \$ Pay the cable TV 31 \$
5 Of all the possible choices, what are we actually buying? And Why? If we like healthy food and our own bedroom, we will choose the first option If we like crowded apartments and we absolutely need the Wilson racket, we will choose the second option The actual choice depend on our TASTE, on our PREFERENCES

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6 Our Consumption Choices Our decisions can be divided in two parts We have to determine all available choices, given our income: BUDGET CONSTRAINT Of all the available choices we choose the one that we prefer: PREFERENCES and INDIFFERENCE CURVES
7 The Budget Constraint • If an individual has I dollars to allocate between good x and good y p x x + p y y I Quantity of x Quantity of y The individual can afford to choose only combinations of x and y in the shaded triangle If all income is spent on y , this is the amount of y that can be purchased y p I If all income is spent on x , this is the amount of x that can be purchased x p I

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8 First-Order Conditions for a Maximum • We can add the individual’s preferences to show the utility-maximization process Quantity of x Quantity of y U 1 A The individual can do better than point
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## This note was uploaded on 04/19/2010 for the course ECON Econ 11 taught by Professor Mcdevitt during the Spring '07 term at UCLA.

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ch04 - Chapter 4 UTILITY MAXIMIZATION AND CHOICE 1 Our...

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