RL1 Review
u A decisionmaker chooses its most preferred alternative from the affordable ones. u Budget set u Preferences (Utility) u Choice (Demand)
Budget set u Budget set: given a) Write down budget constraint b) Illustrate it geometrically (numbers) c) Interpret the slope (econ. and geom.) d) Changes: Price and Income e) Modifications: e.g. Taxes, Subsidies, Gifts
Budget set Graph, Slope, Price and Income Change Taxes, Subsidies, Gifts
Preferences u Preferences: ranking of bundles u Geometric representation – indifference c. u Goods, Bads, Satiated preferences (slopes) u Four examples of preferences –Cob-Douglass –Perfect Complements –Perfect Substitutes –Quasilinear u Utility and MRS u Monotone transformations
Preferences (4 examples) MRS (find, interpret, )
Choice – well behaved preferences u Given and u Note: can be parameters u Find optimal choice on the graph u Secrets of happiness –Geometric interpretation –Economic Interpretation u Analytical solution u Magic formulas
Choice $ $ $$$ $ $$ $$
$ $ $$$ $ $$ $$
Graph, optimality conditions, twist interiority!
Extreme preferences Graph, optimality conditions, twist interiority, !
Magic formulas
Behavior of the demand u Own – price change: Ordinary or Giffen u Income change: Normal or Inferior u Demand and Engel Curve Plot and find them analytically (four examples of preferences) u Other good price change: Gross Substitutes or Complements
Own-price change u TCH=SE+IE u Interpretation u Decomposition: Auxiliary budget line u Relation: Giffen - Inferior goods
Buying and selling u Nominal Income – endowment of goods u Budget set: buying selling u Changing prices u Price offer curve u Find net demands for extreme preferences!
Labor supply u Labor leisure choice u Budget set u Labor leisure Choice u Why labor supply is inelastic
Intertemporal choice u Abstract model = Two period model u Budget set (borrowing, saving) u Preferences (Discount factor and rate) u Choice: Consumption and Savings u Many periods u Annuity and Perpetuity formula u Aplications