Theoretical Tools of Public

Finance

Questions to keep in mind

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How do individuals choose how much to consume or how hard to work?

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How do firms choose how much to produce?

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What is the theoretical effect of raising cash welfare benefits on economic efficiency?

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Theoretical tools are the set of tools designed to understand the mechanics behind economic decision making.

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Empirical tools are the set of tools designed to analyze data and answer questions raised by theoretical analysis.

Constrained Utility Maximization

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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.

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Constrained utility maximization is the process of maximizing the well-being (utility) of an individual, subject to her resources (budget constraint).

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Models is mathematical or graphical representations of reality.