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Unformatted text preview: C H A P T E R 6 Doing the Best We Can We have talked about objective economic circumstances (Chapters 2 and 3) and subjective consumer tastes (Chapters 4 and 5). Now we start talking about choice or behavior . The choices people make, and the behavior we thus observe, results from people doing the best they can given their circumstances where what is best depends not only on what choices are available (i.e. the persons circum- stances) but also how the person feels about the available alternatives (i.e. the per- sons tastes). So we have to put together what we learned about economic circum- stances with what we learned about tastes to talk about choice and behavior. Chapter Highlights The main points of the chapter are: 1. When it is optimal for a consumer to choose some of each of the goods we are modeling, then the marginal rate of substitution must be equal to the ratio of prices at the consumers optimal bundle. If the MRS is not equal to the price ratio at the optimal bundle, then the consumer is at a corner solution and does not consume any of at least one of the goods. 2. When all consumers face the same prices, all gains from trade are exhausted without consumers having to trade with one another. 3. When all consumers face the same prices and end up choosing an interior optimum, they have the same tastes at the margin after they optimize even if their tastes are otherwise very different (and even if their incomes are very different.) 4. So long as all goods are essential (as defined in Chapter 5), the optimum bundle for every consumer will be an interior optimum where the consumer chooses some of all goods. Multiple optimal bundles can arise from non- convexities in either tastes or budgets. 79 6A. Solutions to Within-Chapter-Exercises for Part A 5. Behavior is what we observe individuals actually doing. It results from in- dividuals doing the best they can given their circumstances i.e. it re- sults from individuals combining tastes with budgets as they optimize. While tastes cannot be directly observed, we can infer something about underlying tastes from the actual behavior we observe. Using the LiveGraphs For an overview of what is contained on the LiveGraphs site for each of the chapters (from Chapter 2 through 29) and how you might utilize this resource, see pages 2-3 of Chapter 1 of this Study Guide . To access the LiveGraphs for Chapter 6, click the Chapter 6 tab on the left side of the LiveGraphs web site. At this point, the LiveGraphs site for this chapter has mainly the typical An- imated Graphics , Static Graphics and Downloads . Until we develop further mate- rial, there is one Exploring Relationships module that, like the modules in Chapter 5, is geared toward connecting math and intuition by allowing you to see how the consumer optimum changes for different parameters in budgets and tastes. While this involves the calculus-based material from part B of the Microeconomics: An Intuitive Approach with Calculus...
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This note was uploaded on 11/17/2010 for the course ECON 100A taught by Professor Woroch during the Fall '08 term at University of California, Berkeley.
- Fall '08