Transcript Chapter 9 Intermediate Microeconomics 6th Edition

Chapter 9
Buying and Selling
Maximization Program
• Max U(x1, x2)
• Subject to p1x1+p2x2= p1x10 +p 2x20
• 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
W. W. Norton & Company
Independent and Employee-Owned
This concludes the Norton Media Library
Slide Set for Chapter 9
Intermediate
Microeconomics 6th
by
Hal R. Varian
Edition