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L05 Choice.

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Presentation on theme: "L05 Choice."— Presentation transcript:

1 L05 Choice

2 Problem: We know Preferences Prices and income We want optimal choice

3 Secrets of Happiness (SOH):
x2 x1

4 Abstract approach In the example we were given
we found demands - two numbers Now we use abstract parameters we find demand functionsNow we 4 types of preferences

5 Abstract Cobb Douglass Function
Cobb Douglass utility functions and are equivalent in terms of preferences

6 Magic (Cobb-Douglass) formula
Parameters:

7 Cobb-Douglas: Summary
Utility function: or Solution: Shares of income

8 A) Let and B) Let and

9 Interior and corner solution

10 Interiority Cobb – Douglass (always interior solution)

11 SOH: Extreme preferences
Perfect Complements (shoes) Perfect substitutes (cheese)

12 Perfect Complements: Problem

13 SOH (Perfect Complements)

14 Perfect Complements (SOH)
Interior or corner solution?

15 Is solution always interior?
Not necessarily Perfect Substitutes Quasilinear

16 Perfect Substitutes:Problem
x2 x1

17 Magic Formula (Substitutes)

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