Micro review:Choice theory<br />juliohuato@gmail.com<br />
Choice theory<br />2-good space: apples (a), fig leaves (f)<br />Resource constraint:<br />Collective: Production Possibil...
The 2-good space<br />
PPF assumptions & concepts<br />Assumptions: <br />Given resources<br />Given technology<br />Full employment<br />Two goo...
Concave PPF (increasing MRT)<br />
Linear PPF (constant MRT)<br />
Budget line<br />
Budget line<br />
Graph of Adam’s budget line<br />
Preferences<br />Assumptions:<br />More is better (monotonicity)<br />Averages are better (convexity)<br />Choices are con...
More is better<br />
Averages are better<br />
Consistent choices<br />
An indifference map<br />
Marginal rate of substitution: MRSaf<br />
Optimal choice<br />
Optimal choice<br />
Optimal choice: MRSaf = pa/pf<br />
Deriving the demand curve<br />
Substitution & income effects<br />
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Micro review 2

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Basic concepts in choice theory -- review for government finance students.

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Micro review 2

  1. 1. Micro review:Choice theory<br />juliohuato@gmail.com<br />
  2. 2. Choice theory<br />2-good space: apples (a), fig leaves (f)<br />Resource constraint:<br />Collective: Production Possibilities Frontier (PPF)<br />Individual: Budget line<br />Preferences<br />Optimal choice<br />Derivation of individual demand<br />
  3. 3. The 2-good space<br />
  4. 4. PPF assumptions & concepts<br />Assumptions: <br />Given resources<br />Given technology<br />Full employment<br />Two goods<br />Concepts:<br />Feasible set: Bundles that can be produced<br />Efficiency: The frontier bundles<br />MRTaf = MCa/MCf(definition)<br />
  5. 5. Concave PPF (increasing MRT)<br />
  6. 6. Linear PPF (constant MRT)<br />
  7. 7. Budget line<br />
  8. 8. Budget line<br />
  9. 9. Graph of Adam’s budget line<br />
  10. 10. Preferences<br />Assumptions:<br />More is better (monotonicity)<br />Averages are better (convexity)<br />Choices are consistent (transitivity)<br />
  11. 11. More is better<br />
  12. 12. Averages are better<br />
  13. 13. Consistent choices<br />
  14. 14. An indifference map<br />
  15. 15. Marginal rate of substitution: MRSaf<br />
  16. 16. Optimal choice<br />
  17. 17. Optimal choice<br />
  18. 18. Optimal choice: MRSaf = pa/pf<br />
  19. 19. Deriving the demand curve<br />
  20. 20. Substitution & income effects<br />

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