Class Note-Taking, EAP assignment 2

Representative Consumer Behavior

(1) Consumer preferences

(ⅰ) Basic assumptions

(a) Complete: (C1, L1)>(C2,L2), (C2,L2)>(C1,L1),(C1,L1)=(C2,L2)

(b) Consistency: If (C1, L1)> (C2, L2), then (C2, L2) not true

(c) Transitivity: If (C1, L1)> (C2, L2), (C2, L2)> (C3, L3), then (C1, L1)> (C3, L3)

            (d) More is better

     (ⅱ) Indifference curves: Convex

(ⅲ) Indifference map: All combinations of goods/services

(ⅳ) Marginal rate of substitution: Diminishing

          

(2) Budget Constraints

      (ⅰ) Basic assumptions 

(a)    consumers are price taker

(b)    C consumption good: numeraire

(c)    L leisure good: opportunity cost = wage rate W

(d)    Time constraint: H=L+N  Income Tax: T

   Rental rate: R   Capital: K

     (ⅱ) Total income = Total expenditure

                  WH+RK-T = C+WL

                  C = -WL+WH+RK-T

(3) Consumer Choice

      (ⅰ) Max U(C, L): S.T. W (H-L) +RK-T=C

      (ⅱ) Using Lagrange Function 

   

   (ⅲ) Optional Choice