Theoretical Tools of Public
Finance
 
Questions to keep in mind
How do individuals choose how much to consume or how hard to work?
How do firms choose how much to produce?
What is the theoretical effect of raising cash welfare benefits on economic efficiency?
 
Theoretical tools are the set of tools designed to understand the mechanics behind economic decision making.
Empirical tools are the set of tools designed to analyze data and answer questions raised by theoretical analysis.
 
Constrained Utility Maximization
Utility Function is a mathematical function-representing an
individual’s set of preferences, which translates ger well
-being from different consumption bundles into units that can be compared in order to determine choice.
Constrained utility maximization is the process of maximizing the well-being (utility) of an individual, subject to her resources (budget constraint).
Models is mathematical or graphical representations of reality.
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