Hints for study questions (Revised) #2.3 (Ill deal with this tomorrow) This is the comprehensive question about the entire lecture in 9/22. Observed behavior: For each basket (x,y), we know price of x, price of y, and income m. In other words, we know demand function x=hx (Px,Py,m) and y=hy(Px,Py,m). In order to explain this given behavior, now we need to construct our own model, Read the following steps. I. Clarify all assumptions about consumer behavior (This is questions #2.2) II. Explain how to find the optimal choice, namely, utility maximizing basket (most preferred basket) for given (Px,Py,m). You should do this in two aspects, geometrically and numerically, -Geometric way: Why should utility maximizing point locate on a point of the budget constraint? In order to explain this, you use assumptions we made in step I. -You can wrap up this process by using numerical term. At the utility maximizing point such that given budget constraint, we have (price of x/price of y) = Marginal Utility of x/Marginal Utility of y). This is equivalent to (Marginal Utility of x/Price of x)=(Marginal Utility of y/ Price of y). You can show why the equality holds here. III So, by this process, weve finally constructed the solid mechanism to explain why a point (x,y) is chosen under given (Px,Py,m). In other words, now we can explain the observed behavior, demand function. p.s In fact, actually observed behavior is just several points of (x,y) under its corresponding (Px,Py,m). So the demand function itself is also fictitious equipment in our mind. But, here, please suppose that we want to explain EVERY POSSIBLE case of observed behaviors. In other words, given observe points to us are not just concrete several cases in our daily life, but general consumers behavior under every variable situation from fluctuating px,py,m.
Posted on: Thu, 25 Sep 2014 17:20:54 +0000