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Chapter 9 Buying and Selling

Chapter 9 Buying and Selling. Maximization Program. Max U(x 1 , x 2 ) Subject to p 1 x 1 +p 2 x 2 = p 1 x 1 0 +p 2 x 2 0 Endowment, price ratio, and U jointly determine whether you will be acting as a seller or a buyer. Factors affecting the budget line.

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Chapter 9 Buying and Selling

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  1. Chapter 9Buying and Selling

  2. 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.

  3. 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.

  4. 09.01

  5. 09.02

  6. 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.

  7. 09.03

  8. 09.04

  9. 09.05

  10. 09.06

  11. Slutsky Equation with Initial Endowments • Pure substitution Effect • Income Effect • Endowment Effect

  12. 09.07

  13. Example: Leisure-Choice Model • Max U(C, L) • S.t. C=w(T-L)+V

  14. 09.08

  15. 09.09

  16. 09.10

  17. This concludes the Norton Media LibrarySlide Set for Chapter 9IntermediateMicroeconomics 6th EditionbyHal R. Varian W. W. Norton & CompanyIndependent and Employee-Owned

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