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Unformatted text preview: Chapter Five Choice 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? Rational Constrained Choice x 1 x 2 Rational Constrained Choice x 1 x 2 Utility Rational Constrained Choice Utility x 2 x 1 Rational Constrained Choice x 1 x 2 Utility Rational Constrained Choice Utility x 1 x 2 Rational Constrained Choice Utility x 1 x 2 Rational Constrained Choice Utility x 1 x 2 Rational Constrained Choice Utility x 1 x 2 Rational Constrained Choice Utility x 1 x 2 Affordable, but not the most preferred affordable bundle. Rational Constrained Choice x 1 x 2 Utility Affordable, but not the most preferred affordable bundle. The most preferred of the affordable bundles. Rational Constrained Choice x 1 x 2 Utility Rational Constrained Choice Utility x 1 x 2 Rational Constrained Choice Utility x 1 x 2 Rational Constrained Choice Utility x 1 x 2 Rational Constrained Choice x 1 x 2 Rational Constrained Choice x 1 x 2 Affordable bundles Rational Constrained Choice x 1 x 2 Affordable bundles Rational Constrained Choice x 1 x 2 Affordable bundles More preferred bundles Rational Constrained Choice Affordable bundles x 1 x 2 More preferred bundles Rational Constrained Choice x 1 x 2 x 1 * x 2 * Rational Constrained Choice x 1 x 2 x 1 * x 2 * (x 1 *,x 2 *) is the most preferred affordable bundle. Rational Constrained Choice The most preferred affordable bundle is called the consumers ORDINARY DEMAND at the given prices and budget. Ordinary demands will be denoted by x 1 *(p 1 ,p 2 ,m) and x 2 *(p 1 ,p 2 ,m). Rational Constrained Choice When x 1 * > 0 and x 2 * > 0 the demanded bundle is INTERIOR . If buying (x 1 *,x 2 *) costs $m then the budget is exhausted. Rational Constrained Choice x 1 x 2 x 1 * x 2 * (x 1 *,x 2 *) is interior. (x 1 *,x 2 *) exhausts the budget. Rational Constrained Choice x 1 x 2 x 1 * x 2 * (x 1 *,x 2 *) is interior. (a) (x 1 *,x 2 *) exhausts the budget; p 1 x 1 * + p 2 x 2 * = m. Rational Constrained Choice x 1 x 2 x 1 * x 2 * (x 1 *,x 2 *) is interior ....
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 Fall '08
 Hansen
 Microeconomics

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