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1、5ChoiceEconomicRationalityTheprincipalbehavioralpostulateisthatadecisionmakerchoosesitsmostpreferredalternativefromthoseavailabletoit.Theavailablechoicesconstitutethechoiceset.Howisthemostpreferredbundleinthechoicesetlocated?RationalConstrainedChoicex1x2Rational
2、ConstrainedChoiceUtilityx2x1RationalConstrainedChoicex1x2UtilityRationalConstrainedChoiceUtilityx1x2RationalConstrainedChoiceUtilityx1x2RationalConstrainedChoicex1x2UtilityAffordable,butnotthemostpreferredaffordablebundle.Themostpreferred oftheaffordablebundles.
3、RationalConstrainedChoicex1x2UtilityRationalConstrainedChoiceUtilityx1x2RationalConstrainedChoiceUtilityx1x2RationalConstrainedChoiceUtilityx1x2RationalConstrainedChoicex1x2RationalConstrainedChoicex1x2Affordable bundlesRationalConstrainedChoiceThemostpreferreda
4、ffordablebundleiscalledtheconsumer’sORDINARYDEMANDatthegivenpricesandbudget.Ordinarydemandswillbedenotedby x1*(p1,p2,m)andx2*(p1,p2,m).RationalConstrainedChoiceWhenx1*>0andx2*>0thedemandedbundleisINTERIOR.Ifbuying(x1*,x2*)costs$mthenthebudgetisexhausted.Rational
5、ConstrainedChoicex1x2x1*x2*(x1*,x2*)isinterior.(x1*,x2*)exhauststhe budget.RationalConstrainedChoice(x1*,x2*)satisfiestwoconditions:(a)thebudgetisexhausted; p1x1*+p2x2*=m(b)theslopeofthebudgetconstraint,-p1/p2,andtheslopeoftheindifferencecurvecontaining(x1*,x2*)
6、areequalat(x1*,x2*).ComputingOrdinaryDemandsHowcanthisinformationbeusedtolocate(x1*,x2*)forgivenp1,p2andm?ComputingOrdinaryDemands-aCobb-DouglasExample.SupposethattheconsumerhasCobb-Douglaspreferences.ComputingOrdinaryDemands-aCobb-DouglasExample.Supposethatthec
7、onsumerhasCobb-Douglaspreferences.ThenComputingOrdinaryDemands-aCobb-DouglasExample.SotheMRSisComputingOrdinaryDemands-aCobb-DouglasExample.SotheMRSisAt(x1*,x2*),MRS=-p1/p2so(A)ComputingOrdinaryDemands-aCobb-DouglasExample.(x1*,x2*)alsoexhauststhebudgetso(B)Comp
8、utingOrdinaryDemands-aCobb-DouglasExample.Sonowweknowthat(A)(B)ComputingOrdinaryDemands-aCobb-DouglasExample.Sonowweknowthat(A)(B)SubstituteandgetThissimplifiesto….Co
