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Chapter Five Choice. Economic Rationality u The principal behavioral postulate is that a decisionmaker chooses its most preferred alternative from those.

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Presentation on theme: "Chapter Five Choice. Economic Rationality u The principal behavioral postulate is that a decisionmaker chooses its most preferred alternative from those."— Presentation transcript:

1 Chapter Five Choice

2 Economic Rationality u The principal behavioral postulate is that a decisionmaker chooses its most preferred alternative from those available to it. u The available choices constitute the choice set. u How is the most preferred bundle in the choice set located?

3 Rational Constrained Choice x1x1 x2x2

4 x1x1 x2x2 Utility

5 Rational Constrained Choice Utility x2x2 x1x1

6 Rational Constrained Choice x1x1 x2x2 Utility

7 Rational Constrained Choice Utility x1x1 x2x2

8 Rational Constrained Choice Utility x1x1 x2x2

9 Rational Constrained Choice Utility x1x1 x2x2

10 Rational Constrained Choice Utility x1x1 x2x2

11 Rational Constrained Choice Utility x1x1 x2x2 Affordable, but not the most preferred affordable bundle.

12 Rational Constrained Choice x1x1 x2x2 Utility Affordable, but not the most preferred affordable bundle. The most preferred of the affordable bundles.

13 Rational Constrained Choice x1x1 x2x2 Utility

14 Rational Constrained Choice Utility x1x1 x2x2

15 Rational Constrained Choice Utility x1x1 x2x2

16 Rational Constrained Choice Utility x1x1 x2x2

17 Rational Constrained Choice x1x1 x2x2

18 x1x1 x2x2 Affordable bundles

19 Rational Constrained Choice x1x1 x2x2 Affordable bundles

20 Rational Constrained Choice x1x1 x2x2 Affordable bundles More preferred bundles

21 Rational Constrained Choice Affordable bundles x1x1 x2x2 More preferred bundles

22 Rational Constrained Choice x1x1 x2x2 x1*x1* x2*x2*

23 x1x1 x2x2 x1*x1* x2*x2* (x 1 *,x 2 *) is the most preferred affordable bundle.

24 Rational Constrained Choice x1x1 x2x2 x1*x1* x2*x2* (x 1 *,x 2 *) is interior. (x 1 *,x 2 *) exhausts the budget.

25 Rational Constrained Choice x1x1 x2x2 x1*x1* x2*x2* (x 1 *,x 2 *) is interior. (b) The slope of the indiff. curve at (x 1 *,x 2 *) equals the slope of the budget constraint.

26 Rational Constrained Choice u (x 1 *,x 2 *) satisfies two conditions: u (a) the budget is exhausted; p 1 x 1 * + p 2 x 2 * = m u (b) the slope of the budget constraint, -p 1 /p 2, and the slope of the indifference curve containing (x 1 *,x 2 *) are equal at (x 1 *,x 2 *).

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