Upcoming SlideShare
×

# Micro review 2

736 views

Published on

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

2 Likes
Statistics
Notes
• Full Name
Comment goes here.

Are you sure you want to Yes No
• Be the first to comment

Views
Total views
736
On SlideShare
0
From Embeds
0
Number of Embeds
141
Actions
Shares
0
19
0
Likes
2
Embeds 0
No embeds

No notes for slide

### 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 />