1

I. Introduction

2

3

Economic Theory of Choice - Certainty

1. Feasible Opportunity Set2. Criteria for Choice3. Optimum Choice4. Equilibrium as Aggregate

Assume 10,000 income in each oftwo periodsTransfer at 5%

Then Die

4

Opportunity Set - What are the possibilities?

Extremes

My mother-in-law spend as much as you can now

Rational world can only borrow what can pay

back

A + (.05)A = 10,000

A = = 19,524

Scrooge - save as much as you can

10,000 + 10,000 (1.05) = 20,500

All possibilities on bounded straight line

05.1000,10

2 1

2 1

1 2

C = 10,000 + 1.05 (10,000 - C )

C = 20,500 - 1.05 C

for C 0 C 0

5

6

7

8