# Chapter 9 Buying and Selling. Maximization Program Max U(x 1, x 2 ) Subject to p 1 x 1 +p 2 x 2 = p 1 x 1 0 +p 2 x 2 0 Endowment, price ratio, and U jointly.

## Presentation on theme: "Chapter 9 Buying and Selling. Maximization Program Max U(x 1, x 2 ) Subject to p 1 x 1 +p 2 x 2 = p 1 x 1 0 +p 2 x 2 0 Endowment, price ratio, and U jointly."— Presentation transcript:

Maximization Program Max U(x 1, x 2 ) Subject to p 1 x 1 +p 2 x 2 = p 1 x 1 0 +p 2 x 2 0 Endowment, price ratio, and U jointly determine whether you will be acting as a seller or a buyer.

Factors affecting the budget line Endowment (shifting the budget line without changing the slope). It produces an income effect. Prices (rotating the budget line around the endowment point). It produces both substitution and income effects.

09.01

09.02

Buyer or Seller as Price Changes The following diagram shows that you remain as a seller in the x1 market. A further decrease in p1 may move you from a seller to a buyer in the x1 market. Derive the demand for x1 for a model with initial endowments.

09.03

09.04

09.05

09.06

Slutsky Equation with Initial Endowments Pure substitution Effect Income Effect Endowment Effect

09.07

Example: Leisure-Choice Model Max U(C, L) S.t. C=w(T-L)+V

09.08

09.09

09.10

This concludes the Norton Media Library Slide Set for Chapter 9 Intermediate Microeconomics 6 th Edition by Hal R. Varian W. W. Norton & Company Independent and Employee-Owned

Download ppt "Chapter 9 Buying and Selling. Maximization Program Max U(x 1, x 2 ) Subject to p 1 x 1 +p 2 x 2 = p 1 x 1 0 +p 2 x 2 0 Endowment, price ratio, and U jointly."

Similar presentations