1. L09
Review

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

3. 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

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

5. 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

6. Preferences (4 examples)
MRS (find, interpret, )

7. 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

8. Choice
Graph, optimality conditions, twist interiority!

9. Extreme preferences
Graph, optimality conditions, twist interiority, !

10. Magic formulas

11. 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

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

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

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