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Chapter 9
Buying and Selling
Maximization Program
• Max U(x1, x2)
• Subject to p1x1+p2x2= p1x10 +p 2x2
0
• 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.
09.01
09.02
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.
09.03
09.04
09.05
09.06
Slutsky Equation with Initial Endowments
• Pure substitution Effect
• Income Effect
• Endowment Effect
09.07
Example: Leisure-Choice Model
• Max U(C, L)
• S.t. C=w(T-L)+V
09.08
09.09
09.10
This concludes the Norton Media LibrarySlide Set for Chapter 9
IntermediateMicroeconomics 6th Edition
by
Hal R. Varian
W. W. Norton & CompanyIndependent and Employee-Owned