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L05

L05. Choice. Problem:. We know Preferences Prices and income We want optimal choice. Secrets of Happiness (SOH):. x 2. x 1. Abstract approach. In the example we were given we found demands - two numbers Now we use abstract parameters we find demand functionsNow we

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L05

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  1. L05 Choice

  2. Problem: • We know • Preferences • Prices and income • We want optimal choice

  3. Secrets of Happiness (SOH): x2 x1

  4. Abstract approach • In the example we were given we found demands - two numbers • Now we use abstract parameters • we find demand functionsNow we • 3 types of preferences

  5. Abstract Cobb Douglass Function • Cobb Douglass utility functions and are equivalent in terms of preferences

  6. Magic (Cobb-Douglass) formula Parameters:

  7. Cobb-Douglas: Summary Utility function: or Solution: Shares of income

  8. Example Let and Shares of income: Money spent Optimal consumption

  9. Quiz Suppose and Q: Optimal consumption of is A) B) C) D)

  10. Interior and corner solution Definitions - Interior solution - Corner solution

  11. Interiority Cobb – Douglass (always interior solution)

  12. SOH: Extreme preferences • Perfect Complements (shoes) • Perfect substitutes (cheese) • Troublemakers

  13. Perfect Complements: Problem

  14. SOH (Perfect Complements)

  15. Perfect Complements (SOH) Interior or corner solution?

  16. Is solution always interior? • Not necessarily • Perfect Substitutes • Quasilinear

  17. Perfect Substitutes:Problem x2 x1

  18. Magic Formula (Substitutes)

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