中级西方经济学5.ppt

Chapter 5 Choice What Are We Doing in This Chapter After modeling a consumer’s choice set (budget line) and his preference (utility function), we now put them together and model how he/she makes optimal choice. In mathematical terms, this is a constrained maximization problem In economics, this is a rational choice problem Ⅰ.Rational Constrained Choice The most preferred affordable bundle is called the consumer’s ORDINARY DEMAND at the given prices and budget Ordinary demands will be denoted by When , the demanded bundle is interior . If buying costs m ,then the budget is exhausted Analysis of Interior Solution An interior solution must satisfies two conditions: (a) the budget is exhausted (b) the slope of the budget constraint –p1/p2, and the slope of the indifference curve containing are equal at Computing Ordinary Demands --a Cobb-Douglas Example Suppose that the consumer has C-D preference Then So the MRS is Continued At the optimal point, MRS=-P1/P2, So And at this point, the budget is exhausted So we will find that the most preferred affordable bundle for a consumer with C-D preferences is Rational Constrained Choice When and the income has been exhausted, and indifference curves have no “kinks”, the ordinary demands are obtained by solving: Exception—Corner Solution But what if x1*=0 Of if x2*=0 If either x1*=0 and x2*=0, then the ordinary demand(x1*,x2*) is at a corner solution to the problem of maximizing utility subject to a budget constraint. Case 1: Perfect Competitive So when U(x1,x2)=x1+x2, the most preferred affordable bundle is (x1*,x2*) where Case 2: Non- Convext Preference Case 3: Perfect Complement Summary:Three Steps to Find the Optimal  Choice of the Consumer 1st step: Draw the budget set; 2nd step: Draw the indifference curves; 3rd step: Locate the point of optimal c