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Lecture

Topic 4 - Choice


Department
Economics
Course Code
ECO206Y1
Professor
Loren Brandt

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Topic 4 Choice
(Lecture 2 Sept 23rd)
Assume: x1,x2; p1,p2;
x2
x1
Math: Constrained Optimization
-- U(x1,x2); Max(x1,x2) s.t. p1x1+p2x2=Y
      
-- Solve: 3 first-order conditions;
1.
 
   
2.
 
    
3. 
      
-- Intuition:
MUx1 = 
 = ;
MUx2 = 
 =  

 left: MRS (internal marginal valuation)
right: OC (external marginal valuation)
Budget Constraint: x1p1 + x2p2 = Y
Intuition:
-- Points on the budget constraint represent choices
that fully exhaust individuals income;
-- Every bundle on the budget constraint is associated
with an indifference curve and defines a level of utility;
-- The individual has to choose the bundle on the
constraint that maximized the individuals utility;
-- The max is given by a tangency.
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