8_GraphicalConstraintedOptimization

# 8_GraphicalConstraintedOptimization - Calvin ECON 410...

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“I’m a simple man with complex tastes.” -Calvin ECON 410 Constrained Optimization (Graphical)

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2 Class 8 - Constrained Optimization (Graphical)
3 MRS Cheat Sheet 1. The maximum amount of B the individual would be willing to give up to get one more unit of A. 2. The minimum amount of B the individual would need to receive to give up one unit of A. 3. (The negative of) the derivative of the indifference curve, B=f(A). 4. 9. , MRS A B , MRS B A 1 = , MRS A A B B U U Class 8 - Constrained Optimization (Graphical)

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4 Class 8 - Constrained Optimization (Graphical) Graphical Analogy How to people make a choice ? a b
5 Class 8 - Constrained Optimization (Graphical) Mathematical Analogy How to people make a choice ? a b

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6 Class 8 - Constrained Optimization (Graphical) WHO CARES?!?
Group-Clicker Question (P): Assume an individual has rational, monotonic preferences over cookies. What bundle will he choose? 1 2 3 4 0% 0% 0% 0% 1. 0 cookies 2. 100 cookies 3. 1000 cookies 4. More

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8 Class 8 - Constrained Optimization (Graphical) How to people make a choice ?
9 Class 8 - Constrained Optimization (Graphical)

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10 Class 8 - Constrained Optimization (Graphical) Good 2 Good 1 I 1 I 2 I 3 I 4 I 5
Group-Clicker Question (P): If these preferences are monotonic and convex, which of these four points would an individual select (assuming individuals select their most preferred bundle)? 1 2 3 4 0% 0% 0% 0% A B C D 1. A 2. B 3. C 4. D

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12 Class 8 - Constrained Optimization (Graphical) Good 2 Good 1 I 1 I 2 I 3 I 4 I 5
13 Class 8 - Constrained Optimization (Graphical) Budget Set The Budget S et is the set of all bundles from which an individual can choose.

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Group-Clicker Question (1 pt): Books cost \$100. Meals cost \$10. You have \$500. Bundles are in the form (Books, Food). For instance, (3,2) is three books and two meals. Is (5,0) in your budget set? 1 2 0% 0% 1. Yes 2. No
Group-Clicker Question (1 pt): Books cost \$100. Meals cost \$10. You have \$500. Bundles are in the form (Books, Food). For instance, (3,2) is three books and two meals. Is (5,2) in your budget set? 1 2 0% 0% 1. Yes 2. No

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Group-Clicker Question (1 pt): Books cost \$100. Meals cost \$10. You have \$500. Bundles are in the form (Books, Food). For instance, (3,2) is three books and two meals. Is (3,0) in your budget set? 1 2 0% 0% 1. Yes 2. No
Group-Clicker Question (1 pt): Books cost \$100. Meals cost \$10. You have \$500. Bundles are in the form (Books, Food). For instance, (3,2) is three books and two meals. Is (0,50) in your budget set? 1 2 0% 0% 1. Yes 2. No

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Meals cost \$10. You have \$500. Bundles are in the form (Books, Food). For instance, (3,2) is three books and two meals. Is (3,10) in your budget set? 1
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8_GraphicalConstraintedOptimization - Calvin ECON 410...

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