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RL1

RL1. Review. Review. A decisionmaker chooses its most preferred alternative from the affordable ones. Budget set Preferences (Utility) Choice (Demand). Budget set. Budget set: given Write down budget constraint Illustrate it geometrically (numbers)

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RL1

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  1. RL1 Review

  2. Review • A decisionmaker chooses its most preferred alternative from the affordable ones. • Budget set • Preferences (Utility) • Choice (Demand)

  3. Budget set • Budget set: given • Write down budget constraint • Illustrate it geometrically (numbers) • Interpret the slope (econ. and geom.) • Changes: Price and Income • Modifications: e.g. Taxes, Subsidies, Gifts

  4. Budget set Graph, Slope, Price and Income Change Taxes, Subsidies, Gifts

  5. Preferences • Preferences: ranking of bundles • Geometric representation – indifference c. • Goods, Bads, Satiated preferences (slopes) • Four examples of preferences • Cob-Douglass • Perfect Complements • Perfect Substitutes • Quasilinear • Utility and MRS • Monotone transformations

  6. Preferences (4 examples) MRS (find, interpret, 0.000001)

  7. Choice – well behaved preferences • Given and • Note: can be parameters • Find optimal choice on the graph • Secrets of happiness • Geometric interpretation • Economic Interpretation • Analytical solution • Magic formulas

  8. Choice $ $ $ $ $ $ $ $ $ $

  9. Choice $ $ $ $ $ $ $ $ $ $

  10. Choice Graph, optimality conditions, twist interiority!

  11. Extreme preferences Graph, optimality conditions, twist interiority, !

  12. Magic formulas

  13. Behavior of the demand • Own – price change: Ordinary or Giffen • Income change: Normal or Inferior • Demand and Engel Curve Plot and find them analytically (four examples of preferences) • Other good price change: Gross Substitutes or Complements

  14. Own-price change • TCH=SE+IE • Interpretation • Decomposition: Auxiliary budget line • Relation: Giffen - Inferior goods

  15. Buying and selling • Nominal Income – endowment of goods • Budget set: buying selling • Changing prices • Price offer curve • Find net demands for extreme preferences!

  16. Labor supply • Labor leisure choice • Budget set • Labor leisure Choice • Why labor supply is inelastic

  17. Intertemporal choice • Abstract model = Two period model • Budget set (borrowing, saving) • Preferences (Discount factor and rate) • Choice: Consumption and Savings • Many periods • Annuity and Perpetuity formula • Aplications

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