ECON 050 Lecture Notes - Lecture 9: Marginal Revenue Productivity Theory Of Wages, Marginal Product
Document Summary
Utility maximization is actually a constrained optimization problem: Goal: optimize utility; want to make ourselves happy as possible. Constraint: limited budget; budget based on our income and prices of. Income and substitution effects goods we want to purchase. Recall - when the price of a good changes, two effects occur: substitution effect. Separating the se and ie (se), real-income effect (ie) When the price of a good changes, our consumption changes. Our goal is to separate which part of that consumption change is due to the. Se and which part is due to the ie. We can analyze both goods not just the good that experienced the price change. E. g. suppose we have two goods, x, y. Se: we will purchase less of x, more y. Ie: real-income decreased -> causes us to purchase less of both goods. 2/3rds of all income generated by the u. s. economy are in wages and salaries.