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Unformatted text preview: Lecture 11 27 October 2009 EC1000 A. Cohen 1 E C O N O M I C S PARKIN BADE Lecture 11 27 October 2009 E C O N O M I C S PARKIN BADE Chapter 9 Possibilities, Preferences, and Choices Chapter 9 Overview ♦ Alternative treatment consumer choice and utility maximization ♦ Indifference Curve Analysis of how household chooses to allocate income among goods and services. 4 parts to model: • 1. consumption possibilities  budget line • 2. preferences  indifference curves • 3. use 1 & 2 → utility maximizing choice • 4. predictions of model Lecture 11 27 October 2009 EC1000 A. Cohen 2 Consumption Possibilities continued P P m p = P P P Q Q Y p p m p m = ¡ ♦ Budget line shows limits to consumption, given income and prices. Consider example of movies (horizontal axis) and pop (vertical axis) ♦ Budget equation ♦ relative price of movies in terms of pop Affordable Unaffordable Income Movies Pop $40 $8 $4 Figure 9.1 The Budget Line 2 8 10 Pop Movies 2 4 6 8 4 1 3 5 7 9 10 6 A B C D E F Qp = 10 – 2Qm ♦ Budget equation ♦ relative price of movies in terms of pop ♦ Intercepts measure real income in movies ( xintercept), pop ( yintercept) ♦ ↓ P m → flatter budget line, fixed popintercept ♦ ↓ P p → steeper budget line, fixed movie intercept ♦ ↓ Y → leftward parallel shift budget line continued P P m p = P P Q Q Y p p m p m = ¡ P Lecture 11 27 October 2009 EC1000 A. Cohen 2 Consumption Possibilities...
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This note was uploaded on 01/09/2012 for the course ECON 1000 taught by Professor Paschakis during the Fall '08 term at York University.
 Fall '08
 paschakis
 Utility

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