notes march 24th

notes march 24th - Comm402 Maximization of Utility o...

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Comm402 3/24/10 Maximization of Utility o Superimpose two graphs on same axes: Indifference map (all the indifference lines) Consumption possibility line (the one budget line) o Tangent (just touching bottom of curvy part of indifference curve) maximizes utlity Bottom of curvy part: highest indiff curve Tangent: budget line doesn’t go above the indiff curve Tangent point is the “equilibrium point” – a rational actor won’t move from it What if prices change? o Indifference map won’t change o Budget line will change So will have a new tangent point o An interesting implication: if lower price of books, albert ends up with more books nad more burgers Tangent point moved both right and up pg. 171 What if prices change? o Ex of school principal who worries that kids have bad nutrition because school lunches too expensive Makes lunch cheaper Discover kids also buying more candy o Same as Albert. Cheaper lunches delivered the lunches, but also freed more money
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notes march 24th - Comm402 Maximization of Utility o...

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