Economic Models

In our models to this point in the course, the producer problem is max revenue subject to the PPF and the consumer problem is max utility (happiness) subject to the budget constraint. Prices link the two sides together. We know from the brief statement about “models” in the beginning of the week 2 notes that, by design, models capture lots of relevant information but inherently leave out some details.

What are some additional details about a “producer problem” and “consumer problem” that could be added to the models to make them more realistic?

For example, in the real world not everyone faces the same prices all the time – restaurants, movie theaters, and stores might offer students, senior citizens, or military veterans a discount, while others pay “full price.” Please think deeply about our models and cite some other examples where they fall short of real-world instances. Then explain how adapting the models to those instances would change the consumer/producer problems as presented in this course.