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:Problemx2 x1

18. Magic Formula (Substitutes)