Chapter 9 Buying and Selling. Maximization Program Max U(x 1, x 2 ) Subject to p 1 x 1 +p 2 x 2 = p...

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