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# Choice - Chapter Five Choice Economic Rationality The...

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Chapter Five Choice

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Economic Rationality The principal behavioral postulate is that a decision maker chooses its most preferred alternative from those available to it. The available choices constitute the choice set. How is the most preferred bundle in the choice set located?
Rational Constrained Choice x 1 x 2

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Rational Constrained Choice Affordable bundles x 1 x 2 More preferred bundles
Rational Constrained Choice x 1 x 2 x 1 * x 2 *

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Rational Constrained Choice x 1 x 2 x 1 * x 2 * (x 1 *,x 2 *) is the most preferred affordable bundle.
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.
Rational Constrained Choice x 1 x 2 x 1 * x 2 * (x 1 *,x 2 *) is interior. (x 1 *,x 2 *) exhausts the budget.

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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.
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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Choice - Chapter Five Choice Economic Rationality The...

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