Suppose the consumer’s income were to increase. Optimal choice changes. How?

The last lecture investigated which bundle of goods the consumer prefers. However, goods cost money and the consumer cannot afford to buy indefinite amounts of each good

Consumers make choices over bundles of goods. Consumer theory models the way in which these choices are made. A good is simply a product — such as apples or bananas. A good may be specified in terms of time — such as

There are two countries, Home (H) and Foreign (F). There are two goods, units of wine (Qw) and cheese (Qc). Suppose there is one factor of production, labour, which is available in amounts L and L

All the models considered so far have one thing in common. There is no uncertainty. This is a very restrictive assumption. Often in economic situations there is less than perfect information. Both production and consumption often involve unknown variables that affect the profits and utility of the agents

A consumption externality is a situation where a consumer cares directly about another agent’s consumption or production of a particular good. An externality can be positive or negative: 1. Negative: Loud mobile phone use in public places. 2. Positive: Pipe smoking in enclosed public places

In the last lecture two concepts were introduced: Pareto efficiency and general equilibrium. How do they relate? Theorem: The first welfare theorem states that every general equilibrium involves a Pareto efficient llocation

Endowments and Allocations Consider first the case of a pure exchange economy. (One with no production). Suppose there are two consumers, A and B, in a two good economy. A starts with an endowment of ωA =

Production — Oligopoly 1 Cournot Duopoly Suppose there are two firms in an industry. Their strategy spaces are quantities. Their payoffs are profits. Industry demand is given by the inverse demand function, P(Q), where industry production is Q = q1 + q2. They

Production — Games 1 Monopolistic Competition Monopolistic competition arises when there are a large number of price-setting firms in an industry with free entry. Suppose there are n firms. In the short run, each firm faces an nth of the market demand curve