Note_04M.1-4

Note_04M.1-4 - 1 Chapter 4 Characteristics of the...

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1 Chapter 4. Characteristics of the Opportunity Set Under Risk Decision Under Certainty An economic decision always involves the set of choices (opportunity set) and preference of the decision maker over those choices. In microeconomics, you learned the decision-making of a consumer between two goods subject to a given income and prices. The utility (preference) maximizing bundle is chosen. You also learned producer’s decision to minimize the cost of inputs to produce a given amount of output subject to the prices of inputs and production technology. In Chapter 1 of this textbook, an example of savings decision over two periods is presented. An individual earns $10,000 each year ( ), and needs to decide how much to consume in each period, and . There is no uncertainty: income in each period and interest rate on savings or borrowings are known with certainty. Opportunity Set Case 1: He can save or borrow at annual interest rate r=5% (a) no saving and no borrowing: (point A in the figure below)
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Note_04M.1-4 - 1 Chapter 4 Characteristics of the...

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