Chapter 1
The Economic Approach
Economics is a social science.1 Social sciences are concerned with the study of human behavior.
If you asked the next person you meet while walking down the street what denes the di erence
between economics and other social
Nolan Miller
Notes on Microeconomic Theory: Chapter 3
ver: Aug. 2006
ensure that the problem is well-behaved, we will assume that preferences are rational, continuous,
convex, and locally nonsatiated.
utility function
These assumptions imply that the cons
Nolan Miller
Notes on Microeconomic Theory: Chapter 3
better than ,
=cfw_
ver: Aug. 2006
| . Just as monotonicity told us something about the shape of
indi erence sets, we can also make assumptions that tell us about the shape of upper and lower
level set
Nolan Miller
Notes on Microeconomic Theory: Chapter 2
ver: Aug. 2006
order to make sure that you are not made worse o by the price change, I am also going to change
0,
your wealth to
and wealth (
0
0
where
0 ).
is chosen so that you can still just a ord b
Nolan Miller
Notes on Microeconomic Theory: Chapter 2
ver: Aug. 2006
So, now we have an expression relating the changes in the amount of commodities demanded in
response to a change in wealth. What does it say? The left hand side is the change in expendit
Nolan Miller
3.3.5
Notes on Microeconomic Theory: Chapter 3
ver: Aug. 2006
The Indirect Utility Function and Welfare Evaluation
Consider the situation where the price of good 1 increases from
1
0.
1
to
What is the impact
of this price change on the consum
Nolan Miller
Notes on Microeconomic Theory: Chapter 3
ver: Aug. 2006
x
x'
p'
p
Figure 3.15: Compensated Demand
(d)
P
= 0 for all . This follows from the homogeneity of degree zero of
( ) in
. Consider the identity:
(
Di erentiate with respect to
)
(
and e
Nolan Miller
Notes on Microeconomic Theory: Chapter 4
ver: Aug. 2006
Expenditure
(y )
(y*, l*)
w
y = w + s(24 - l)
Leisure (l)
24
Figure 4.3: Labor-Leisure Choice
Thus the main di erence between the standard model and the endowment model lies in this
adju
Nolan Miller
4.2.3
Notes on Microeconomic Theory: Chapter 4
ver: Aug. 2006
Does individual WARP imply aggregate WARP?
The next aggregation question we consider is whether the fact that individuals make consistent
choices implies that aggregate choices wil
Nolan Miller
Notes on Microeconomic Theory: Chapter 3
the utility levels before and after the change. To compute
ver: Aug. 2006
, return to the denition of
we
used before.
=
0
Adding and subtracting (
=
But, note that (
0
0)
0 ),
0
=
we get:
0
0
and
=
and
Nolan Miller
Notes on Microeconomic Theory: Chapter 3
1
whether
0,
1
0,
=
or
is measured in dollar terms.
indirect utility function.
1
ver: Aug. 2006
0.
However, the units now have meaning. The di erence
(
) is often called a money metric
Because of this,