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Unformatted text preview: Chapter 5 - Choice 1. Optimal choice (a) move along the budget line until preferred set doesnt cross the budget set (see figure 5.1. in the textbook). (b) note that tangency occurs at optimal point - necessary condition for optimum. In symbols: MRS =- priceratio =- p 1 /p 2 . • exception - kinky tastes (see figure 5.2. in the textbook). • exception - boundary optimum (see figure 5.3. in the textbook). (c) tangency is not sufficient (see figure 5.4. in the textbook). • unless indifference curves are convex. • unless optimum is interior. (d) optimal choice is demanded bundle • as we vary prices and income, we get demand functions. • want to study how optimal choicethe demanded bundle - changes as price and income change 2. Examples (a) perfect substitutes: x 1 = m/p 1 if p 1 < p 2 ; 0 otherwise (see figure 5.5. in the textbook). (b) perfect complements: x 1 = m/ ( p 1 + p 2 ) (see figure 5.6. in the textbook)....
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- Summer '10
- optimal choice