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
4 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. A) Let and
B) Let and

9. Interior and corner solution

10. Interiority
Cobb – Douglass (always interior solution)

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

12. Perfect complements
Right and left shoe

13. Perfect complements
Coffee and 2 teaspoons of sugar

14. Perfect Complements: Problem

15. SOH (Perfect Complements)

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

17. Is solution always interior?
Not necessarily
Perfect Substitutes
Quasilinear

18. Perfect Substitutes:Problemx2 x1

19. Magic Formula (Substitutes)