RL1 Review

Review A decisionmaker chooses its most preferred alternative from the affordable ones. Budget set Preferences (Utility) Choice (Demand)

Budget set Budget set: given Write down budget constraint Illustrate it geometrically (numbers) Interpret the slope (econ. and geom.) Changes: Price and Income Modifications: e.g. Taxes, Subsidies, Gifts

Budget set Graph, Slope, Price and Income Change Taxes, Subsidies, Gifts

Preferences Preferences: ranking of bundles Geometric representation – indifference c. Goods, Bads, Satiated preferences (slopes) Four examples of preferences Cob-Douglass Perfect Complements Perfect Substitutes Quasilinear Utility and MRS Monotone transformations

Preferences (4 examples) MRS (find, interpret, 0.000001)

Choice – well behaved preferences Given and Note: can be parameters Find optimal choice on the graph Secrets of happiness Geometric interpretation Economic Interpretation Analytical solution Magic formulas

Choice $ $ $ $ $ $ $ $ $ $

Choice $ $ $ $ $ $ $ $ $ $

Choice Graph, optimality conditions, twist interiority!

Extreme preferences Graph, optimality conditions, twist interiority, !

Magic formulas

Behavior of the demand Own – price change: Ordinary or Giffen Income change: Normal or Inferior Demand and Engel Curve Plot and find them analytically (four examples of preferences) Other good price change: Gross Substitutes or Complements

Own-price change TCH=SE+IE Interpretation Decomposition: Auxiliary budget line Relation: Giffen - Inferior goods

Buying and selling Nominal Income – endowment of goods Budget set: buying selling Changing prices Price offer curve Find net demands for extreme preferences!

Labor supply Labor leisure choice Budget set Labor leisure Choice Why labor supply is inelastic

Intertemporal choice Abstract model = Two period model Budget set (borrowing, saving) Preferences (Discount factor and rate) Choice: Consumption and Savings Many periods Annuity and Perpetuity formula Aplications