Tsinghua Micro Ch5 020920 - Chapter Five Choice Where Are...

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Where Are We Doing in This Chapter? After modeling a consumer’s choice set and his preference (represented by utility functions), we now put them together and model how he/she makes optimal choice. In mathematical terms, this is a constrained maximization problem; In economics, this is a rational choice problem.
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Rational Constrained Choice Affordable bundles x 1 x 2 More preferred bundles
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Rational Constrained Choice The most preferred affordable bundle is called the consumer’s 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).
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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.
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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.
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Rational Constrained Choice x 1 x 2 x 1 * x 2 * (x 1 *,x 2 *) is interior . (b) The slope of the indiff. curve at (x 1 *,x 2 *) equals the slope of the budget constraint.
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Rational Constrained Choice (x 1 *,x 2 *) satisfies two conditions: (a) the budget is exhausted; p 1 x 1 * + p 2 x 2 * = m (b) the slope of the budget constraint, -p 1 /p 2 , and the slope of the indifference curve containing (x 1 *,x 2 *) are equal at (x 1 *,x 2 *).
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This note was uploaded on 12/06/2011 for the course BUSINESS MicroEco taught by Professor Luyu during the Spring '11 term at Tsinghua University.

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Tsinghua Micro Ch5 020920 - Chapter Five Choice Where Are...

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