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x1
Rational Constrained Choice
Utility x2
x1
Rational Constrained Choice
Utility
x2
x1
Rational Constrained Choice
Utility
x2
x1
Rational Constrained Choice
Utility
x2
x1
Rational Constrained Choice
Utility
x2
x1
Rational Constrained Choice
x2
x1
Rational Constrained Choice
Utility
x2
x1
Rational Constrained Choice
x2
Utility
x1
Rational Constrained Choice
x2
Utility
x1
Rational Constrained Choice
x2
x1
Rational Constrained Choice
x2
More preferred
bundles
Affordable
bundles
x1
Rational Constrained Choice
x2
More preferred
bundles
Affordable
bundles
x1
Rational Constrained Choice
x2
x1* x1
Rational Constrained Choice
The most preferred affordable bundle
is called the consumer’s ordinary
demand (Marshallian demand) at the
given prices and budget.
(x1*,x2*) is interior
x2*
x1
x1*
Rational Constrained Choice
x2
x2*
x1
x1*
Rational Constrained Choice
x2
x1
x1*
Rational Constrained Choice
(x1*,x2*) satisfies two conditions:
* am
x1 = .
( a + b ) p1
Interior Demands: C-D Utility
am
x*1 = .
( a + b ) p1
is
( x*1 , x*2 ) = ( am
,
bm
( a + b ) p1 ( a + b ) p 2
) .
Interior Demands: C-D Utility
x2
a b
U( x 1 , x 2 ) = x 1 x 2
*
x2 =
bm
( a + b)p2
x1
am
x*1 =
( a + b ) p1
Rational Constrained Choice
When x1* > 0 and x2* > 0
and (x1*,x2*) exhausts the budget,
and ICs have no kinks,
the ordinary demands can be obtained
by solving 2 eqs:
(a) budget: p1x1* + p2x2* = y
(b) tangency: the slopes of the budget
and of the IC at (x1*,x2*) are equal.
Rational Constrained Choice
But what if x1* = 0 or x2* = 0, given
consumer preferences?
x2
IC: MRS = -1
x1
Corner: Perfect Substitutes
x2
y IC: MRS = -1
*
x2 =
p2
x*1 = 0 x1
Corner: Perfect Substitutes
x2
IC: MRS = -1
y
( x1 , x 2 ) =
* *
,0 if p1 < p2
p1
and
y
( x1 , x 2 ) =
* *
0, if p1 > p2
p2
Corner: Perfect Substitutes
x2
IC: MRS = -1
y
p2 Budget slope = -p1/p2 with p1 = p2
x1
y
p1
Corner: Perfect Substitutes
x2
y All the bundles in the IC
p2 are equally preferred
when p1 = p2.
x1
y
p1
Corner: Non-Convex Preferences
x2
x1
Corner: Non-Convex Preferences
The “tangency solution” is not the most
x2 preferred affordable bundle.
x1
Kinky Solutions: Perfect Complements
Demand: x2 = ax1
x1
Kinky Solutions: Perfect Complements
U(x1,x2) = min{ax1, x2}
x2
MRS = -
MRS is undefined
x2 = ax1
MRS = 0
x1
Kinky Solutions: Perfect Complements
x2 = ax1
x1
Kinky Solutions: Perfect Complements
U(x1,x2) = min{ax1, x2}
x2
(a) p1x1* + p2x2* = m
(b) x2* = ax1*
x2 = ax1
x2*
x1
x1*
Kinky Solutions: Perfect Complements
p1x1* + p2ax1* = m
Kinky Solutions: Perfect Complements
m
*
x1 =
p1 + ap 2
Kinky Solutions: Perfect Complements
m am
*
x1 = ; x2 =
*
.
p1 + ap 2 p1 + ap 2
A bundle of 1 commodity 1 unit and
a commodity 2 units costs p1 + ap2.
x*2 = x2 = ax1
am
p1 + ap2
m
x1
x*1 =
p1 + ap 2
51
Excercise
1/ Elmer’s utility function is U(x; y) = min(x,y2)
(a) If Elmer consumes 4 units of x and 3 units of y, his utility is .
(b) If Elmer consumes 4 units of x and 2 units of y, his utility is .
(c) If Elmer consumes 5 units of x and 2 units of y, his utility is .
(d) Draw the indifierence curve for Elmer that contains the bundles that he likes
exactly as well as the bundle (4; 2).
(e) Draw the indifierence curve for Elmer that contains bundles that he likes
exactly as well as the bundle (1; 1) and the indifierence curve that passes
through the point (16; 5).
(f ) On your graph, show the locus of points at which Elmer’s indifierence curves
have kinks. What is the equation for this curve? .
(g) On the same graph, use black ink to draw Elmer’s budget line when
the price of x is 1, the price of y is 2, and his income is 8. What bundle doe Elmer
choose in this situation?
52
Excercise
2/ Linus has the utility function U(x; y) = x + 3y.
(a) Draw the indifierence curve passing through the point (x; y) = (3; 3). Use black
ink to sketch the indifierence curve connecting bundles that give Linus a utility of 6.
(b) On the same graph, draw Linus’s budget line if the price of x is 1 and the price
of y is 2 and his income is 8. What bundle does Linus choose in this situation? .
(c) What bundle would Linus choose if the price of x is 1, the price of y is 4, and his
income is 8?
53