Micro review:Choice theoryjuliohuato@gmail.com

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

The 2-good space

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)

Concave PPF (increasing MRT)

Linear PPF (constant MRT)

Budget line

Budget line

Graph of Adam’s budget line

PreferencesAssumptions: More is better (monotonicity) Averages are better (convexity) Choices are consistent (transitivity)

More is better

Averages are better

Consistent choices

An indifference map

Marginal rate of substitution: MRSaf

Optimal choice

Optimal choice

Optimal choice: MRSaf = pa/pf

Deriving the demand curve

Substitution & income effects