ch04 ppt notes

# ch04 ppt notes - Chapter Four Consumer Choice Chapter Four...

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1 Consumer Choice Chapter Four Chapter Four

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2 Chapter Four Overview 1. Motivation 1. The Budget Constraint 1. Consumer Choice 1. Duality 1. Some Applications 6. Revealed Preference Chapter Four
3 Chapter Four Motivation

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4 Price of x: P x ; Price of y: P y Income: I Total expenditure on basket (X,Y): P x X + P y Y Assume only two goods available: X and Y The Basket is Affordable if total expenditure does not exceed total Income: P X X + P Y Y I Chapter Four The Budget Constraint
5 Budget Set: The set of baskets that are affordable Budget Constraint: The set of baskets that the consumer may purchase given the limits of the available income. Budget Line: The set of baskets that one can purchase when spending all available income. Chapter Four Key Definitions

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6 Two goods available: X and Y I = \$10 P x = \$1 P y = \$2 Budget Line 1: 1X + 2Y = 10 Or Y = 5 – X/2 Chapter Four A Budget Constraint Example
7 I/P X = 10 Y X A C I/P Y = 5 Budget line = BL 1 -P Y = -1/2 If the price of X rises, the budget line gets steeper and the horizontal intercept shifts in If the price of X falls, the budget line gets flatter and the horizontal intercept shifts out Chapter Four A Budget Constraint Example

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8 Y X 10 5 BL 1 6 12 BL 2 I = \$12 P X = \$1 P Y = \$2 Y = 6 - X/2 …. BL 2 If the price of X rises, the budget line gets steeper and the horizontal intercept shifts in If the price of X falls, the budget line gets flatter and the horizontal intercept shifts out Shift of a budget line Chapter Four A Budget Constraint Example
9 Y X 5 6 I = \$10 P X = \$1 P Y = \$3 Y = 3.33 - X/3 …. BL 2 BL 1 BL 2 3.3 3 10 If the price of X rises, the budget line gets steeper and the horizontal intercept shifts in If the price of X falls, the budget line gets flatter and the horizontal intercept shifts out Chapter Four Rotation of a budget line A Budget Constraint Example

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10 Consumer’s Problem: Max U(X,Y) (X,Y) Subject to: P x X + P y Y < I Chapter Four Consumer Choice Assume: Only non-negative quantities "Rational” choice: The consumer chooses the basket that maximizes his satisfaction given the constraint that his budget imposes.
11 Interior

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ch04 ppt notes - Chapter Four Consumer Choice Chapter Four...

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