The Purpose of this Chapter To begin to understand the art of building an economic model To begin to understand three basic elements of modeling in economics: –Purpose –Simplification through assumptions –Value judgment

Main Issue Mean-Variance Utility Budget Constraints for Risky Assets Measuring Risk Capital Asset Pricing Model

Main Issue A state-contingent consumption plan Preferences Under Uncertainty and Expected utility Risk-aversion, risk-loving, and risk￾neutrality Competitive Insurance

Structure From Individual to Market Demand Functions Elasticities Revenue and ownprice- elasticity of demand Marginal revenue and price elasticity

Structure The cost minimization problem Average costs Returns to scale and total and average costs Short run and long run costs

Structure Utility function(效用函数) Definition Monotonic transformation(单调转换) Examples of utility functions and their indifference curves Marginal utility(边际效用) Marginal rate of substitution边际替代率 MRS after monotonic transformation

Structure Money equivalent of utility gains to trade Consumer's' surplus Changes in consumer's' surplus Compensating and equivalent variations Producer's' surplus

Structure Endowments(禀赋) Budget constraints with endowments Net demands -Price offer curve Example: Labor supply Comparative statics Slutsky equation revisited

Structure When to sell an asset? -rate-of -return- Arbitrage Taxation of asset returns Depletable resources Financial intermediaries

Structure Describe budget constraint -Algebra Graph Describe changes in budget constraint Government programs and budget constraints on- -linear budget lines