Economics 2150A/B Study Guide - Constrained Optimization, Exogeny, Equation

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ECON 2150A/B Full Course Notes
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ECON 2150A/B Full Course Notes
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Document Summary

Need to sacrifice one thing for more of another. Exogenous variable value is taken as given in analysis of econ system. Determined outside of the model fixed variable cannot control. Endogenous variable -> value determined within econ system being studied. Result is variable model affects variable dependent. Used when decision maker seeks to make best choice, taking into account any possible limitations or restrictions on choices. 2 parts objective function and set of constraints. Objective function relationship that decision maker seeks to optimize (maximize or minimize) Constraints restrictions or limits on decision maker. Eg. try to maximize area (objective function) under certain limit (constraint) Solution to constrained opt prom marginal impact of decision variables on value of objective function. Marginal tells us how dependent variable changes as result of adding one unit of independent variable. Marginal cost measures incremental impact of last unit of indept. variable on dependent variable rate of change of dependent variable.

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