微观经济学Microeconomics英文课件 05 Choice.ppt

Recall As price is the same for all individuals, every individual has the same MRS at the optimal consumption bundle, even if they have very different preferences. Thus, it can be interpreted as a social willingness to pay for good 1 in terms of good 2. * In this chapter we put together budget constraint and preference together to analyze consumption decision. Typically, if we have interior solution, then the optimal condition is MRS=p1 / p2. It can also have corner solution if one good is not consumed at all. * Next, we will look at comparative statics. In particular, how will prices and income changes affect the optimal consumption bundle? * * * * * Substituting for x1* in then gives * So we have discovered that the mostpreferred affordable bundle for a consumerwith Cobb-Douglas preferences is * x1 x2 * With the optimal bundle: Note the expenditures on each good: It is a property of Cobb-Douglas Utility function that expenditure share on a particular good is a constant. * * 1. Tangency condition is only necessary but not sufficient. 2. There can be more than one optimum. * 3. Strict Convexity implies unique solution. But what if x1* = 0? Or if x2* = 0? If either x1* = 0 or x2* = 0 then the ordinary demand (x1*,x2*) is at a corner solution to the problem of maximizing utility subject to a budget constraint. E.g. it happens when the indifference curves are too flat or steep relative to the budget line. * * The indifference curves are too steep in this case to touch the budget line. The willingness to pay for good 2 is still lower than the price of good 2 even when x2 is zero. The mathematical treatment for corner solution is more complicated. We have to consider also the inequality constraints. (x1 ≥0 and x2 ≥0) We skip the details here. * x1 x2 MRS = 1 * x1 x2 MRS = 1 Slope = -p1/p2 with p1 p2. * x1 x2 MRS = 1 Slope = -p1/p2 with p1 p2. * x1 x2 MRS = 1 Slope = -p1/p2 with p1 p2. * x1 x2 MRS = 1 Slope = -p1/p2 with p1 p2. * So when U(x1,x2) =