chapter 9 buying and selling. maximization program max u(x 1, x 2 ) subject to p 1 x 1 +p 2 x 2 = p...

Chapter 9 Buying and Selling

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Chapter 9

Buying and Selling

Maximization Program

• Max U(x1, x2)

• Subject to p1x1+p2x2= p1x10 +p 2x2

• Endowment, price ratio, and U jointly determine whether you will be acting as a seller or a buyer.

Factors affecting the budget line

• Endowment (shifting the budget line without changing the slope). It produces an income effect.

• Prices (rotating the budget line around the endowment point). It produces both substitution and income effects.

Page 4: Chapter 9 Buying and Selling. Maximization Program Max U(x 1, x 2 ) Subject to p 1 x 1 +p 2 x 2 = p 1 x 1 0 +p 2 x 2 0 Endowment, price ratio, and U jointly

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Page 5: Chapter 9 Buying and Selling. Maximization Program Max U(x 1, x 2 ) Subject to p 1 x 1 +p 2 x 2 = p 1 x 1 0 +p 2 x 2 0 Endowment, price ratio, and U jointly

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Page 6: Chapter 9 Buying and Selling. Maximization Program Max U(x 1, x 2 ) Subject to p 1 x 1 +p 2 x 2 = p 1 x 1 0 +p 2 x 2 0 Endowment, price ratio, and U jointly

Buyer or Seller as Price Changes

• The following diagram shows that you remain as a seller in the x1 market.

• A further decrease in p1 may move you from a seller to a buyer in the x1 market.

• Derive the demand for x1 for a model with initial endowments.

Page 7: Chapter 9 Buying and Selling. Maximization Program Max U(x 1, x 2 ) Subject to p 1 x 1 +p 2 x 2 = p 1 x 1 0 +p 2 x 2 0 Endowment, price ratio, and U jointly

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Page 8: Chapter 9 Buying and Selling. Maximization Program Max U(x 1, x 2 ) Subject to p 1 x 1 +p 2 x 2 = p 1 x 1 0 +p 2 x 2 0 Endowment, price ratio, and U jointly

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Page 9: Chapter 9 Buying and Selling. Maximization Program Max U(x 1, x 2 ) Subject to p 1 x 1 +p 2 x 2 = p 1 x 1 0 +p 2 x 2 0 Endowment, price ratio, and U jointly

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Page 10: Chapter 9 Buying and Selling. Maximization Program Max U(x 1, x 2 ) Subject to p 1 x 1 +p 2 x 2 = p 1 x 1 0 +p 2 x 2 0 Endowment, price ratio, and U jointly

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Page 11: Chapter 9 Buying and Selling. Maximization Program Max U(x 1, x 2 ) Subject to p 1 x 1 +p 2 x 2 = p 1 x 1 0 +p 2 x 2 0 Endowment, price ratio, and U jointly

Slutsky Equation with Initial Endowments

• Pure substitution Effect

• Income Effect

• Endowment Effect

Page 12: Chapter 9 Buying and Selling. Maximization Program Max U(x 1, x 2 ) Subject to p 1 x 1 +p 2 x 2 = p 1 x 1 0 +p 2 x 2 0 Endowment, price ratio, and U jointly

09.07

Page 13: Chapter 9 Buying and Selling. Maximization Program Max U(x 1, x 2 ) Subject to p 1 x 1 +p 2 x 2 = p 1 x 1 0 +p 2 x 2 0 Endowment, price ratio, and U jointly

Example: Leisure-Choice Model

• Max U(C, L)

• S.t. C=w(T-L)+V

Page 14: Chapter 9 Buying and Selling. Maximization Program Max U(x 1, x 2 ) Subject to p 1 x 1 +p 2 x 2 = p 1 x 1 0 +p 2 x 2 0 Endowment, price ratio, and U jointly

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Page 15: Chapter 9 Buying and Selling. Maximization Program Max U(x 1, x 2 ) Subject to p 1 x 1 +p 2 x 2 = p 1 x 1 0 +p 2 x 2 0 Endowment, price ratio, and U jointly

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Page 16: Chapter 9 Buying and Selling. Maximization Program Max U(x 1, x 2 ) Subject to p 1 x 1 +p 2 x 2 = p 1 x 1 0 +p 2 x 2 0 Endowment, price ratio, and U jointly

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Page 17: Chapter 9 Buying and Selling. Maximization Program Max U(x 1, x 2 ) Subject to p 1 x 1 +p 2 x 2 = p 1 x 1 0 +p 2 x 2 0 Endowment, price ratio, and U jointly

This concludes the Norton Media LibrarySlide Set for Chapter 9

IntermediateMicroeconomics 6th Edition

Hal R. Varian

W. W. Norton & CompanyIndependent and Employee-Owned

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chapter 9 buying and selling. maximization program max u(x 1, x 2 ) subject to p 1 x 1 +p 2 x 2 = p...

Documents

v slide

norton media library

budget line endowment

endowment point

x1 market

income effects

price changes

price ratio