In this chapter we model a consumers choice of consumption over time. This is known as intertemporal choice.
The budget constraint
Assume two periods, say, today and tomorrow denoted 1 and 2 respectively. Denote consum
Microeconomic Theory II Problem Set 3 Question 1 Tony Almeida and Michelle Dessler are dispatched from the Counter Terrorist Unit (CTU) on a secret mission to infiltrate a mafia gang who plots to obtain biological weapon from the black market. To ensure T
Review: The Market
We review here chapter 1 of Varians Intermediate Microeconomics.1
Optimization and equilibrium
The two principles of economics are 1) The optimization principle - people choose actions that are in their (best) interest, an
Review: Budget Constraint
We review here chapter 2 of Varians Intermediate Microeconomics.1 In consumer theory, the consumer chooses the best bundles of goods (s)he can aord. There are two parts to theory, 1) can aord, which refers to the budget
People choose the best things they can aord.
(x1 , x2 ) (y1 , y2 ) means the x-bundle is strictly preferred to the y-bundle. (x1, x2) (y1 , y2 ) means that the x-bundle is regarded as indierent to the
A utility function is a way of assigning a number to every possible consumption bundle such that more-preferred bundles get assigned larger numbers than less-preferred bundles.Tht is, (x1 , x2 ) (y1 , y2 ) if and only if u(x1 , x
The choice (x , x ) is an optimal choice for the consumer, i.e. it is a point 12 on the highest indierence curve that just touches the budget line. 1
CHAPTER 5. REVIEW: CHOICE
Finding the optimal choice
The consumers demand function can be written as
x1 = x1 (p1 , p2 , m)
Normal and inferior goods
For a normal good, the quantity demanded always changes in the same direction as income (e.g., if income increases, quantity deman
Review: Slutsky Equation
This chapter looks more closely at how a consumers choice of a good responds to a change in its price.
The substitution eect
When the price of a good changes, there are two eects: the rate at which you can exchange o
Microeconomic Theory II Problem set on Uncertainty Question 1 Sarah preference is described by utility U = W1/2, where W is here wealth level. She is facing a possible loss of her car worth $1000 with probability 0.1. Suppose that an insurance company wil
Microeconomic Theory II Problem Set 1
Question 1 The legendary 007 James Bonds favorite drink is Vodka Martini and he likes it shaken, not stirred. This is made by 2 shots of vodka and 4 shots of dry martini, then shaking it with ice in the cocktail shake
We review here some of the basic mathematics required to study and learn microeconomics. Please note that I will update this as well as make any revisions and corrections as we progress through the course.
In this chapter we study individual behavior with respect to choices involving uncertainty.
A consumer is presumably concerned with a probability distribution of getting dierent consumption bundles. A pro
In this chapter we provide an alternative and simplied model of behavior under uncertainty.
In the last chapter we examined the expected utility model of choice under uncertainty. Another approach to choic
Up to now we have basically considered markets for a single good in isolation. Equilibrium in a single market was discussed to understand how demand and supply were aected by a particular good we were examining. This is called partial
In the previous chapter we looked at the general equilibrium model of a pure exchange economy where people have xed endowments of goods and examined how they might trade those goods themselves. In this chapter we describe how product
Exer ci ses PT 1
[ pl ease do not di st r i but e]
Ch 2: Budget Const r ai nt
You shoul d l ear n t o: W i t e an equat i on f or t he budget l i ne and dr aw t he r budget set on a gr aph when you ar e gi ven pr i ces and i ncom or when you ar e gi ven
Exer ci ses PT 2
[ Pl ease do not di st r i but e]
Ch 8: Sl ut sky Equat i on
For t hi s chapt er , you shoul d be abl e t o do t he f ol l owi ng: Fi nd Sl ut sky i ncom ef f ect and subst i t ut i on ef f ect of a e s peci f i c pr i ce change i f you
Exer ci ses PT 3
[ Pl ease do not di st r i but e]
Ch 12: Uncer t ai nt y
I n t he next f ew weeks, t he gover nm ent i s goi ng t o deci de whet her or not t o devel op an expensi ve new weapons syst em . I f t he syst em i s appr oved, i t wi l l be ve
Review: Buying and Selling
9.1 Net and gross demand
Suppose the consumer starts o with some endowment of two goods (1 , 2 ). This is how much of the two goods the consumer has before he enters the market. If need to dierentiate between gross dem