Chapter 5 Choice This is the chapter where we bring it all together. Make sure that students understand the method of maximization and dont just memorize the various special cases. The problems in the workbook are designed to show the futility of memorizing special cases, but often students try it anyway. The material in Section 5. 4 is very important-I introduce it by saying"Why should you care that the MRS equals the price ratio? The answer is that this allows economists to determine something about peoples' trade-offs by observing market prices. Thus it allows for the possibility of benefit-cost analysi The material in Section 5.5 on choosing taxes is the first big non-obvious result from using consumer theory ideas. I go over it very carefully, to make sure that students understand the result, and emphasize how this analysis uses the techniques that we've developed. Pound home the idea that the nalytic techniques of microeconomics have a big payoff--they allow us to answer questions that we wouldnt have been able to answer without these techniques If you are doing a calculus-based course, be sure to spend some time on the appendix to this chapter. Emphasize that to solve a constrained maximization problem, you must have two equations. One equation is the constraint, and one equation is the optimization condition. I usually work a Cobb-Douglas and a perfect complements problem to illustrate this. In the Cobb-Douglas case, the optimization condition is that the MRS equals the price ratio. In the perfect complements case, the optimization condition is that the consumer chooses a bundle at the corner A. Optimal choice 1. move along the budget line until preferred set doesnt cross the budget set 2. note that tangency occurs at optimal point- necessary condition for optimum. In symbols: MRS=-price ratio=-P1/p2 3. tangency is not sufficient. Figure 5.4 a)unless indifference curves are convex.Chapter 5 13 Chapter 5 Choice This is the chapter where we bring it all together. Make sure that students understand the method of maximization and don’t just memorize the various special cases. The problems in the workbook are designed to show the futility of memorizing special cases, but often students try it anyway. The material in Section 5.4 is very important—I introduce it by saying “Why should you care that the MRS equals the price ratio?” The answer is that this allows economists to determine something about peoples’ trade-offs by observing market prices. Thus it allows for the possibility of benefit-cost analysis. The material in Section 5.5 on choosing taxes is the first big non-obvious result from using consumer theory ideas. I go over it very carefully, to make sure that students understand the result, and emphasize how this analysis uses the techniques that we’ve developed. Pound home the idea that the analytic techniques of microeconomics have a big payoff—they allow us to answer questions that we wouldn’t have been able to answer without these techniques. If you are doing a calculus-based course, be sure to spend some time on the appendix to this chapter. Emphasize that to solve a constrained maximization problem, you must have two equations. One equation is the constraint, and one equation is the optimization condition. I usually work a Cobb-Douglas and a perfect complements problem to illustrate this. In the Cobb-Douglas case, the optimization condition is that the MRS equals the price ratio. In the perfect complements case, the optimization condition is that the consumer chooses a bundle at the corner. Choice A. Optimal choice 1. move along the budget line until preferred set doesn’t cross the budget set. Figure 5.1. 2. note that tangency occurs at optimal point — necessary condition for optimum. In symbols: MRS = −price ratio = −p1/p2. a) exception — kinky tastes. Figure 5.2. b) exception — boundary optimum. Figure 5.3. 3. tangency is not sufficient. Figure 5.4. a) unless indifference curves are convex