ch5.ppt

Chapter Five Choice 选择 Structure Rational constrained choice Computing ordinary demands Interior solution （内在解） Corner solution （角点解） “Kinky” solution Example: Choosing taxes Economic Rationality The principal behavioral postulate is that a decision-maker chooses its most preferred alternative from those available to it. The available choices constitute the choice set. How is the most preferred bundle in the choice set located? Rational Constrained Choice Rational Constrained Choice Rational Constrained Choice Rational Constrained Choice Rational Constrained Choice The most preferred affordable bundle is called the consumer’s ORDINARY DEMAND （一般需求）at the given prices and budget. Ordinary demands will be denoted byx1*(p1,p2,m) and x2*(p1,p2,m). Rational Constrained Choice When x1* 0 and x2* 0 the demanded bundle is INTERIOR. If buying (x1*,x2*) costs $m then the budget is exhausted. Rational Constrained Choice Rational Constrained Choice Rational Constrained Choice Rational Constrained Choice (x1*,x2*) satisfies two conditions: (a) the budget is exhausted; p1x1* + p2x2* = m (b) tangency: the slope of the budget constraint, -p1/p2, and the slope of the indifference curve containing (x1*,x2*) are equal at (x1*,x2*). Meaning of the Tangency Condition Consumer’s marginal willingness to pay equals the market exchange rate. Suppose at a consumption bundle (x1, x2), MRS=-2, -P1/P2=-1 The consumer is willing to give up 2 unit of x2 to exchange for an additional unit of x1 The market allows her to give up only 1 unit of x2 to obtain an additional x1 (x1, x2) is not optimal choice She can be better off increasing her consumption of x1. Computing Ordinary Demands Solve for 2 simultaneous equations. Tangency Budget constraint The conditions may be obtained by using the Lagrangian multiplier method, i.e., constrained optimization in calculus. Computing Ordinary Demands How can this information be used to locate (x1*,x2*) for given p1, p2 and m? Computing Or