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The Theory of Consumer Choice (Optimization (The Consumer's optimal…
The Theory of Consumer Choice
The Budget Constraint
Budget constraint
The slope of budget constraint
Relative price
Preferences
Indifference curves
Higher indifference curves are preferred to lower ones.
Indifference curves are downward sloping.
Indifference curves do not cross.
Indifference curves are bowed inward.
Marginal rate of substitution (MRS)
Two extreme examples
Perfect substitution
Perfect complements
Optimization
The Consumer's optimal choices
MRS = Relative price at the optimum
The same slope at the optimum
The effect of an increase in Income
Normal good
Inferior good
The effect of a price change
Rotate the budget constraint
Slope change
Income and Substitution effects
Income effect
Substitution effect
Huge in substitute goods
Tiny in complement goods
Deriving the Demand curve
Three applications
Giffen good
Wages and Labor supply
Interest rate and Saving
Vietnam-Netherlands Programme - 2017
Do Huu Luat