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Chapter 5

Chapter 5 . Choice of consumption. Optimal choice is at the point in the budget line with highest utility. The tangency solution of an indifferent curve and the budget line: MRS = – p 1 / p 2 . Fig. Basic equations: MU 1 / p 1 = MU 2 / p 2 and

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Chapter 5

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  1. Chapter 5 Choice of consumption

  2. Optimal choice is at the point in the budget line with highest utility. • Thetangencysolution of an indifferent curve and the budget line: MRS = – p1 / p2. Fig.

  3. Basic equations: • MU1 / p1 = MU2 / p2and • p1 x1 + p2 x2 = m. Figs. • ( How if negative solutions.)

  4. Interiorsolutions, and • Boundary (Corner) solutions. • Kinky tastes. Figs.

  5. Three approaches to the basic equations: • Graphically; • As-one-variable; • *Lagrangian.

  6. The optimal choice is the consumer’s demanded bundle. • The demand function.

  7. Examples: • perfect substitutes, • perfect complements, • neutrals and bads, • concave preferences. Figs.

  8. Cobb-Douglas demand functions. • * Choosing taxes. (By *Slutsky decomposition.) Figs.

  9. Chapter 6 Demand

  10. Demand functions: • x1 = x1 (p1, p2, m), • x2 = x2 (p1, p2, m).

  11. Normaland inferiorgoods (by income); Fig. • Luxury and necessarygoods (by income). Fig. • Ordinary and Giffen goods (by price). Fig.

  12. The income expansion path or the income offer curves, • and the Engel curve. Figs.

  13. The price offer curve • and the Demand curve. Figs.

  14. Substitutes and complements. • Cobb-Douglas preferences. • Quasilinear preferences.

  15. * Homothetic preferences: if (x1, x2) is preferred to (y1, y2), then (tx1, tx2) is preferred to (ty1, ty2) for any t > 0. • Thus both the income offer curves and the Engel curves are all rays through the origin.

  16. Example: • Quasilinear preferences lead to vertical (horizontal) income offer curves and vertical (horizontal) Engel curves.

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