I. Albert’s Consumption Possibility a. There is only going to be one budget line but an infinite number of indifference curves that are exactly parallel and do not intersect (in general, not just Albert)b. Maximization of Utilityi. Superimpose two graphs on same axes:1. Indifference map (all the indifference lines)2. Consumption possibility line (the one budget line)ii. Tangent (just touching bottom part of curvy part of indifference curve) maximizes utility1. Bottom of curvy part: Highest indifference curve2. Tangent: budget line doesn’t go above the indifference curve3. Tangent point is the “equilibrium point”- a rational actor wont move from it II. You can move the budget or preference line by getting people to like something moreIII. What if Prices Change?a. Indifference map wont changeb. Budget line will changei. So will have a new tangent point c. An interesting implication: if lower price of books, Albert ends up withmore books AND more hamburgersi. Tangent point moved both right and up, p. 171 d. Example: school principal who worries that kids have bad nutrition because school lunches are too expensivei. Makes lunch cheaperii. Discovers kids also buying more candy and cigarettes iii. Same as Albert. Cheaper lunches delivered the lunches, but also freed more money for candy. 1. Graph; page 171: equil pt moves up and right iv. Would have been better to use money to move (reshape) indifference curves by making the food more attractive 1. Should have started a communication campaign to persuade the kids that the lunches gave more utility than the kids thought they gave, and that candy and cigarettes gave less utility than they thought they gave.2. In other words, change the indifference curve so it intersected with the budget curve in a different place 3. You make the indifference curve flatter or steeper by changing the attitude people have towards something IV. What if budget changes? a. Idk I was on tumblr look online V. Trade-offsa. Essential features of problem:i. Fixed resourcesii. Set of alternative actionsiii. Preference rankings between the actions (i.e., know utilities)iv. Decision rule (e.g., maximize utility) b. Example: Airforce and Navy wanting planes or subs for US defense i. Neither saw more than one choiceii. Step 1: identify the actual goal, defenseiii. Then can analyze the problem 1. What is the marginal utility of one more submarine? How much better is our national security/defense with one more submarine? c. Planes or Subs?i. Budget Lineii. “Equal deterrence” lines = indifference curves1. Ex. This many subs and this many planes equal a different number of subs and planes2. Congressional committee is the first point in the government where the two have to be thought about together 3. You need to get fighter planes and food stamps on the same metric when you are dealing with the entire budget of the federal government iii. Find tangent point P. 176iv. Realistically, either choose the minimum equal deterrence line,and then adjust the budget; or choose the budget line and then find an indifference curve that intersects. v. There is always going to be a budget line even if you are unableto produce
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