Lecture 3 - Choice

Question 1

Economic Rationality

Answer 1

• The principle behavioural postulate is that a decision maker chooses its most preferred alternative from those available to it
• The available choices constitute the choice set
• The solution to this constrained optimisation problem tells us the consumer’s demand function

Question 2

Ordinary Demand

Answer 2

The most preferred affordable bundle is called the consumer’s ordinary demand at the given prices and budget

Question 3

Equilibrium Condition

Answer 3

Indifference curve and budget constraint are tangent

Question 4

Marginal utility principle

Answer 4

Bundle that maximises total utility is such that marginal utility of the last $ spent on each commodity is the same