BEPP 250 Lecture Notes - Lecture 4: Utility, Budget Constraint, The Essential Bugs Bunny

• School: UPenn
• Department: Business Econ & Public Policy
• Course: BEPP 250
• Professor: Eduardo Azevedo

Document Summary

Bepp 250: business & economic public policy - lecture 4: consumer problem. Consumers want to maximize utility subject to budget constraint. You can afford anything under the triangle. To make the optimal decision, solve two equations: P1x1 + p2x2 = m and (mu1 / p1) = (mu2 / p2) All budget is used bang for buck is equalized . This also means that the optimal decision is where. Ex) find the optimal decision given that the utility for lobster chicken (x1) is: u = x1. 1/2 , and p1 = , p2= , and. (mu1 / p1) = (mu2 / p2) (x2 / 10) = (x1 / 50) Note: here we ignore the because recall that utility is ordinal! x 1 now plug this into p1x1 + p2x2 = m. 10 x1 + 50/5 x1 = 200. X1 = 10 now to find x2 plug this back into x2 =