micro review 2
DESCRIPTION
Basic concepts in choice theory -- review for government finance students.TRANSCRIPT
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Micro review:Choice [email protected]
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Choice theory 2-good space: apples (a), fig leaves (f) Resource constraint:
Collective: Production Possibilities Frontier (PPF)
Individual: Budget line Preferences Optimal choice Derivation of individual demand
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The 2-good space
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PPF assumptions & conceptsAssumptions: Given resources Given technology Full employment Two goods
Concepts: Feasible set: Bundles that can be produced Efficiency: The frontier bundles MRTaf = MCa/MCf (definition)
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Concave PPF (increasing MRT)
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Linear PPF (constant MRT)
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Budget line
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Budget line
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Graph of Adam’s budget line
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PreferencesAssumptions: More is better (monotonicity) Averages are better (convexity) Choices are consistent (transitivity)
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More is better
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Averages are better
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Consistent choices
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An indifference map
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Marginal rate of substitution: MRSaf
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Optimal choice
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Optimal choice
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Optimal choice: MRSaf = pa/pf
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Deriving the demand curve
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Substitution & income effects