L05 Choice.

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Presentation transcript:

L05 Choice

Problem: We know Preferences Prices and income We want optimal choice

Secrets of Happiness (SOH): x2 x1

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

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

Magic (Cobb-Douglass) formula Parameters:

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

A) Let and B) Let and

Interior and corner solution

Interiority Cobb – Douglass (always interior solution)

SOH: Extreme preferences Perfect Complements (shoes) Perfect substitutes (cheese)

Perfect Complements: Problem

SOH (Perfect Complements)

Perfect Complements (SOH) Interior or corner solution?

Is solution always interior? Not necessarily Perfect Substitutes Quasilinear

Perfect Substitutes:Problem x2 x1

Magic Formula (Substitutes)