CHAPTER 4 Consumer Choice
|
|
- Silvester Tate
- 7 years ago
- Views:
Transcription
1 CHAPTER 4 Consumer Choice CHAPTER OUTLINE 4.1 Preferences Properties of Consumer Preferences Preference Maps 4.2 Utility Utility Function Ordinal Preference Utility and Indifference Curves Utility and Marginal Utility Utility and Marginal Rates of Substitution 4.3 Budget Constraint Slope of the Budget Constraint Purchasing Fractional Quantities Effect of a Change in Price on Consumption Effect of a Change in Income on Consumption 4.4 Consumer s Constrained Choice The Consumer s Optimum Bundle Optimal Bundles Are on Convex Sections of Indifference Curves Buy Where More Is Better Food Stamps TEACHING TIPS The material in this chapter represents a challenge to students for a number of reasons. Most will not have learned constrained optimization before. Also, utility analysis may seem quite abstract to them. Finally, if, you are using calculus, this is the point where the calculus techniques go beyond the methods they are likely to have learned in their calculus prerequisite. To overcome these stumbling blocks, you may want to devote one class to presenting and discussing the technical points of utility theory and budget lines using one or two running examples, and another class to applications. Whether you decide to present applications as you go, or after presenting the technical material, I find that this is one area where the students have to see the theory applied in order for it to make sense. You might also consider breaking the class into small groups to work on problems that test their understanding (additional problems are provided below). This way, you can migrate among the groups to get a better idea of how many are struggling and who needs help. The methods presented in this chapter will be needed in Chapter 5 for the derivation of demand curves. If they are not confident with the material in this chapter, they are almost certain to struggle not only in Chapter 5, but also when it comes to production and cost, since the methodology there is similar. When discussing the marginal rate of substitution, note that in this text, MRS is left as a negative number (MRS = / Y, which, of course, is negative, rather than MRS = - / Y as in some texts). When presenting the MRS, it is worth the time spent to try to get the class to think hard about the special cases of perfect complements and substitutes. Not only does it help them with commodities that fall into this category, but it also helps them to better understand the more typical case of convexity. The class should see that the notion of a measurable util is nonsense and will find the model more believable given that only ordinal measurability is needed. Section 4.3 on budget lines should not require much class time, though it is worth putting an equation and graph on the board and briefly discussing how parameter changes affect the constraint. 21
2 22 Part One\Teaching Aids For Section 4.4, Constrained Choice, the technical portion of the material should come fairly easily if the class has a solid grasp of indifference curves. Using plenty of examples and applications will make the process of utility maximization seem less abstract. There are several in the text as well as the additional application below. You may want to spend some time contrasting interior solutions and corner solutions. Corner solutions are an effective way to show that the model makes predictions that are intuitively accurate. For example, you can choose combinations of goods such that they are perfect substitutes to demonstrate that the model predicts that the consumer will always buy the one that is cheaper. You can also choose two goods such that one is a good and the other is neutral to show that the consumer will only purchase the good that provides utility. I also spend some time on the notion of bads (see discussion question #2 below). I try to get the class to realize that if the bad is turned on its head, it becomes a good (e.g., less air pollution is more clean air) and that clean air has a positive price that can be measured as the price of abatement. Once transformed, standard maximization methods apply. Finally, I show, using graphs, simple examples of cases where the standard maximization solution does not exist, such as nonlinear budget lines. For example, a consumer may be shown to be indifferent between fewer goods at a higher price, and a larger quantity at a lower price in the case of declining marginal prices. If you are using calculus to present utility theory, indifference curves, and maximization, students should read Appendices 4A and 4B. The Lagrange Multiplier method is covered in Appendix 4B. Note that endof-chapter problems can be assigned as calculus problems. There are also additional calculus-based problems below. Even if you are teaching students who are very strong mathematically, it is probably not worth the time it would take to use functions more complex than Cobb-Douglas or quadratic. Instead, If you have extra time, I recommend that you devote time to the interpretation of the Lagrange multiplier as the marginal value of the constraint. ADDITIONAL APPLICATIONS Transitivity of Preferences How realistic is the assumption of transitive preferences? A number of studies of both humans and animals show that preferences usually are transitive. For example, Wienstein (1968) uses an experiment to determine how frequently people give intransitive responses. 1 None of the subjects knew the purpose of the experiment. They were given choices between ten goods, offered in pairs, in every possible combination. The goods included $3 in cash, an 8-cup Wearever aluminum coffee percolator, and a free pass to the next four Saturday matinees at the subject s favorite movie theatre. They were told that all of the goods had a value of $3, to ensure that monetary value would not affect their calculations. Weinstein found that 93.5% of the responses of adults (at least 18 years old) were transitive. Of children aged 9-12, however, only 79.2% of the responses were transitive. He reasoned that this difference may be a justification for political and economic restrictions and protections placed on youths. Psychologists have also tested for transitivity using preferences for colors, photos of faces, and so forth. For example, Bradbury and Ross (1990) found that, given a choice of three colors, nearly half of 4-5 year olds are intransitive, compared to 15% for year olds, and 5% for adults. 2 Bradbury and Ross show that a novelty (preference for a new color) is responsible for most intransitive responses, and that this effect is especially strong in children. 1. Show using indifference curves and a budget line that if preferences are intransitive, standard utility maximization solutions may not result. 1 Weinstein, Arnold A., Transitivity of Preferences: A Comparison Among Age Groups, Journal of Political Economy, 76(2), March/April 1968: Bradbury, Hinton and Karen Ross, The Effects of Novelty and Choice Materials on the Intransitivity of Preferences of Children and Adults, Annals of Operations Research. 23(1 4) June 1990:
3 Chapter 4\Consumer Choice Suppose three of the subjects meet on the street after the above experiment. Each is carrying one item (the money, the tickets, or the coffee percolator). Two of these individuals have intransitive preferences; the other does not. How many exchanges could take place involving all three people before one would be unwilling to trade? What would your answer be if only one had intransitive preferences? DISCUSSION QUESTIONS 1. Our analysis of consumer behavior focuses on how to maximize the well-being of individual consumers. What alternative objectives might we consider? 2. How can we analyze commodities that are bads (garbage, water pollution)? 3. Name pairs of goods that you consume that are perfect substitutes. 4. Name pairs of goods that you consume that are perfect complements. 5. Can you think of a person who might be satiated in all goods (does not want more of anything)? 6. Discuss the democratic model of one person one vote as a method for the determination of social policy. ADDITIONAL QUESTIONS AND MATH PROBLEMS 1. Maximizing behavior in the context of school performance (not utility maximization) would imply trying to get straight A s. Is maximizing behavior a good assumption in this case? Can you think of another assumption that may be more appropriate for some individuals when attempting to model school performance behavior? 2. Consider two goods that are perfect substitutes. What is likely to be true about their relative prices? Can you confirm your hypothesis with examples? 3. From the total utility schedule shown below, calculate the marginal utility of each additional unit of consumed. Units of : Utility: Suppose a consumer s utility derived from consuming bananas is described by the function U= (1/3) 3. Use the derivative formula found in Equation 4A.1 to compute marginal utility. a) Make a table showing total and marginal utility for from 0 to 7 units. b) Would this individual ever choose to consume more than 7 units? Explain. 5. What information is contained in the slope of an indifference curve? Why are these curves typically convex to the origin? 6. For each of the utility functions below, draw a set of indifference curves showing utility levels U = 12, U = 16, and U = 24. a) U = Y b) U = + Y c) U = - Y d) What is true about the commodities in (b)? e) What about the commodities in (c)?
4 24 Part One\Teaching Aids 7. Suppose a consumer has an income of $500 and faces prices p = 5 and p Z = 10. a) Write the equation for the budget constraint. b) Draw the budget constraint, placing good on the horizontal axis. Label it BC. c) What is the slope of BC? d) Suppose income decreases to $300. Draw the new budget constraint and label it RS. 8. Larry and Teri allocate their consumption between two goods: hats and bats. The price of hats is $4 each and the price of bats is $8 each. For Larry, the marginal utility of the last hat consumed was 8 and the marginal utility of the last bat was 24. For Teri the marginal utility of the last hat was 6 and the marginal utility of the last bat was 12. Which consumer is not maximizing his/her utility? How can you tell? How should he/she change their allocation? 9. Suppose a consumer has income of $120 per period, and faces prices p = 2 and p Z = 3. Her goal is to maximize her utility, described by the function U = 10.5 Z.5. Calculate the utility maximizing bundle (*, Z*) using the methods described in Appendix 4B. 10. Confirm that if a consumer s utility function is described by U = 2 + Z, and prices are p = 2 and p Z = 1, there is no unique utility maximizing solution regardless of income level. What does this tell you about and Zas commodities? (Hint: draw a graph showing a budget constraint and indifference curve using the information provided.) ANSWERS TO ADDITIONAL QUESTIONS AND MATH PROBLEMS 1. Some individuals may practice what is known as satisficing behavior. In the context of school performance, this would mean performing to some minimum acceptable standard, such as C quality work. In the work environment, it implies working just hard enough to not get fired. However, in cases where the individual does not have good information about what minimal performance standards are, or the standards cannot be achieved with certainty, it becomes a very risky strategy. 2. Goods that are perfect substitutes are generally priced equally, or nearly so. For example, stores often price different brands of golf or tennis balls all at one level, or at very similar prices because they must be produced to professional association standards, and so are by definition good substitutes. Different brands of basic food commodities such as bread and milk are also usually priced in a very narrow range at a given store. 3. Units of : MU: MU = a) Units of : MU: (10) b) No. Marginal utility of the 8 th unit would be negative. 5. The slope of an indifference curve indicates the rate at which the consumer is willing to exchange one commodity for the other. This is the Marginal Rate of Substitution (MRS). Indifference curves are typically convex because the consumer places greater value on the last unit of the commodity that is more scarce.
5 Chapter 4\Consumer Choice a) Figure 4.1 b) Figure 4.2 Y Y U = 24 U = 16 U = 12 U = 24 U = 16 U = 12 c) Figure 4.3 Y U = 12 U = 16 U = 24 d) They are perfect substitutes. e) is a good, and Y is a bad, providing exactly the opposite of in utility per unit.
6 26 Part One\Teaching Aids 7. a) Z = 500 b) See Figure 4.4 c) Slope = -1/2 d) See Figure 4.4 Figure 4.4 Z 50 B 30 R 8. Based on Equation 4.6, the ratio of marginal utility per dollar should be equal for the last unit of all commodities. For Teri, the marginal utilities per dollar are equal, for Larry they are not. Larry needs to increase his expenditures on bats, and decrease expenditures on hats, which will cause the marginal utility of hats to rise, and marginal utility of bats to fall. 9. Setting up the Lagrangian as in 4B.2 results in S C L = 10.5 Z.5 - (2+3Z-120) Taking the partial derivative of this function with respect to, Z and λ, and setting equal to zero, results in three equations and three unknowns: L/ = Z.5-2 = 0 L/ Z = 5.5 Z -5-3 = 0 L/ = Z = 0 The easiest way to solve is to take the ratio of the first two equations, and plug the resulting /Z ratio into the third. In this case, * = 30, Z* = Because the commodities are perfect substitutes, and the price ratio is equal to the MRS, any budget line drawn would be coincident with some indifference curve, resulting in no unique solution. The consumer is equally happy choosing any point on the budget line.
Chapter 4 Online Appendix: The Mathematics of Utility Functions
Chapter 4 Online Appendix: The Mathematics of Utility Functions We saw in the text that utility functions and indifference curves are different ways to represent a consumer s preferences. Calculus can
More informationChapter 3 Consumer Behavior
Chapter 3 Consumer Behavior Read Pindyck and Rubinfeld (2013), Chapter 3 Microeconomics, 8 h Edition by R.S. Pindyck and D.L. Rubinfeld Adapted by Chairat Aemkulwat for Econ I: 2900111 1/29/2015 CHAPTER
More informationDeriving Demand Functions - Examples 1
Deriving Demand Functions - Examples 1 What follows are some examples of different preference relations and their respective demand functions. In all the following examples, assume we have two goods x
More information1. Briefly explain what an indifference curve is and how it can be graphically derived.
Chapter 2: Consumer Choice Short Answer Questions 1. Briefly explain what an indifference curve is and how it can be graphically derived. Answer: An indifference curve shows the set of consumption bundles
More informationCHAPTER 3 CONSUMER BEHAVIOR
CHAPTER 3 CONSUMER BEHAVIOR EXERCISES 2. Draw the indifference curves for the following individuals preferences for two goods: hamburgers and beer. a. Al likes beer but hates hamburgers. He always prefers
More informationPreferences. M. Utku Ünver Micro Theory. Boston College. M. Utku Ünver Micro Theory (BC) Preferences 1 / 20
Preferences M. Utku Ünver Micro Theory Boston College M. Utku Ünver Micro Theory (BC) Preferences 1 / 20 Preference Relations Given any two consumption bundles x = (x 1, x 2 ) and y = (y 1, y 2 ), the
More informationManagerial Economics Prof. Trupti Mishra S.J.M. School of Management Indian Institute of Technology, Bombay. Lecture - 13 Consumer Behaviour (Contd )
(Refer Slide Time: 00:28) Managerial Economics Prof. Trupti Mishra S.J.M. School of Management Indian Institute of Technology, Bombay Lecture - 13 Consumer Behaviour (Contd ) We will continue our discussion
More informationConsumers face constraints on their choices because they have limited incomes.
Consumer Choice: the Demand Side of the Market Consumers face constraints on their choices because they have limited incomes. Wealthy and poor individuals have limited budgets relative to their desires.
More informationThe fundamental question in economics is 2. Consumer Preferences
A Theory of Consumer Behavior Preliminaries 1. Introduction The fundamental question in economics is 2. Consumer Preferences Given limited resources, how are goods and service allocated? 1 3. Indifference
More informationc 2008 Je rey A. Miron We have described the constraints that a consumer faces, i.e., discussed the budget constraint.
Lecture 2b: Utility c 2008 Je rey A. Miron Outline: 1. Introduction 2. Utility: A De nition 3. Monotonic Transformations 4. Cardinal Utility 5. Constructing a Utility Function 6. Examples of Utility Functions
More informationA Utility Maximization Example
A Utilit Maximization Example Charlie Gibbons Universit of California, Berkele September 17, 2007 Since we couldn t finish the utilit maximization problem in section, here it is solved from the beginning.
More informationEconomics 301 Problem Set 4 5 October 2007
Economics 301 Name Problem Set 4 5 October 2007 Budget Lines and Indifference Curves and the Consumer Optimum 1. Parvez, a pharmacology student, has allocated $120 per month to spend on paperback novels
More informationTastes and Indifference Curves
C H A P T E R 4 Tastes and Indifference Curves This chapter begins a -chapter treatment of tastes or what we also call preferences. In the first of these chapters, we simply investigate the basic logic
More informationIndifference Curves: An Example (pp. 65-79) 2005 Pearson Education, Inc.
Indifference Curves: An Example (pp. 65-79) Market Basket A B D E G H Units of Food 20 10 40 30 10 10 Units of Clothing 30 50 20 40 20 40 Chapter 3 1 Indifference Curves: An Example (pp. 65-79) Graph the
More informationECN 221 Chapter 5 practice problems This is not due for a grade
ECN 221 Chapter 5 practice problems This is not due for a grade 1. Assume the price of pizza is $2.00 and the price of Beer is $1.00 and that at your current levels of consumption, the Marginal Utility
More informationMERSİN UNIVERSITY FACULTY OF ECONOMICS AND ADMINISTRATIVE SCİENCES DEPARTMENT OF ECONOMICS MICROECONOMICS MIDTERM EXAM DATE 18.11.
MERSİN UNIVERSITY FACULTY OF ECONOMICS AND ADMINISTRATIVE SCİENCES DEPARTMENT OF ECONOMICS MICROECONOMICS MIDTERM EXAM DATE 18.11.2011 TİIE 12:30 STUDENT NAME AND NUMBER MULTIPLE CHOICE. Choose the one
More informationCONSUMER PREFERENCES THE THEORY OF THE CONSUMER
CONSUMER PREFERENCES The underlying foundation of demand, therefore, is a model of how consumers behave. The individual consumer has a set of preferences and values whose determination are outside the
More informationREVIEW OF MICROECONOMICS
ECO 352 Spring 2010 Precepts Weeks 1, 2 Feb. 1, 8 REVIEW OF MICROECONOMICS Concepts to be reviewed Budget constraint: graphical and algebraic representation Preferences, indifference curves. Utility function
More informationProt Maximization and Cost Minimization
Simon Fraser University Prof. Karaivanov Department of Economics Econ 0 COST MINIMIZATION Prot Maximization and Cost Minimization Remember that the rm's problem is maximizing prots by choosing the optimal
More informationEconomics 2020a / HBS 4010 / HKS API-111 FALL 2010 Solutions to Practice Problems for Lectures 1 to 4
Economics 00a / HBS 4010 / HKS API-111 FALL 010 Solutions to Practice Problems for Lectures 1 to 4 1.1. Quantity Discounts and the Budget Constraint (a) The only distinction between the budget line with
More informationFigure 4-1 Price Quantity Quantity Per Pair Demanded Supplied $ 2 18 3 $ 4 14 4 $ 6 10 5 $ 8 6 6 $10 2 8
Econ 101 Summer 2005 In-class Assignment 2 & HW3 MULTIPLE CHOICE 1. A government-imposed price ceiling set below the market's equilibrium price for a good will produce an excess supply of the good. a.
More informationProblem Set #5-Key. Economics 305-Intermediate Microeconomic Theory
Problem Set #5-Key Sonoma State University Economics 305-Intermediate Microeconomic Theory Dr Cuellar (1) Suppose that you are paying your for your own education and that your college tuition is $200 per
More informationSlutsky Equation. M. Utku Ünver Micro Theory. Boston College. M. Utku Ünver Micro Theory (BC) Slutsky Equation 1 / 15
Slutsky Equation M. Utku Ünver Micro Theory Boston College M. Utku Ünver Micro Theory (BC) Slutsky Equation 1 / 15 Effects of a Price Change: What happens when the price of a commodity decreases? 1 The
More informationConstrained optimization.
ams/econ 11b supplementary notes ucsc Constrained optimization. c 2010, Yonatan Katznelson 1. Constraints In many of the optimization problems that arise in economics, there are restrictions on the values
More informationDemand. Lecture 3. August 2015. Reading: Perlo Chapter 4 1 / 58
Demand Lecture 3 Reading: Perlo Chapter 4 August 2015 1 / 58 Introduction We saw the demand curve in chapter 2. We learned about consumer decision making in chapter 3. Now we bridge the gap between the
More informationWeek 1: Functions and Equations
Week 1: Functions and Equations Goals: Review functions Introduce modeling using linear and quadratic functions Solving equations and systems Suggested Textbook Readings: Chapter 2: 2.1-2.2, and Chapter
More informationAn increase in the number of students attending college. shifts to the left. An increase in the wage rate of refinery workers.
1. Which of the following would shift the demand curve for new textbooks to the right? a. A fall in the price of paper used in publishing texts. b. A fall in the price of equivalent used text books. c.
More informationCameron ECON 100: FIRST MIDTERM (A) Winter 01
Cameron ECON 100: FIRST MIDTERM (A) Winter 01 Answer all questions in the space provided on the exam. Total of 40 points (and worth 22.5% of final grade). Read each question carefully, so that you answer
More informationMicroeconomics Sept. 16, 2010 NOTES ON CALCULUS AND UTILITY FUNCTIONS
DUSP 11.203 Frank Levy Microeconomics Sept. 16, 2010 NOTES ON CALCULUS AND UTILITY FUNCTIONS These notes have three purposes: 1) To explain why some simple calculus formulae are useful in understanding
More informationAK 4 SLUTSKY COMPENSATION
AK 4 SLUTSKY COMPENSATION ECON 210 A. JOSEPH GUSE (1) (a) First calculate the demand at the original price p b = 2 b(p b,m) = 1000 20 5p b b 0 = b(2) = 40 In general m c = m+(p 1 b p0 b )b 0. If the price
More informationA Detailed Price Discrimination Example
A Detailed Price Discrimination Example Suppose that there are two different types of customers for a monopolist s product. Customers of type 1 have demand curves as follows. These demand curves include
More informationLecture 2. Marginal Functions, Average Functions, Elasticity, the Marginal Principle, and Constrained Optimization
Lecture 2. Marginal Functions, Average Functions, Elasticity, the Marginal Principle, and Constrained Optimization 2.1. Introduction Suppose that an economic relationship can be described by a real-valued
More informationCommon sense, and the model that we have used, suggest that an increase in p means a decrease in demand, but this is not the only possibility.
Lecture 6: Income and Substitution E ects c 2009 Je rey A. Miron Outline 1. Introduction 2. The Substitution E ect 3. The Income E ect 4. The Sign of the Substitution E ect 5. The Total Change in Demand
More informationEconomics 121b: Intermediate Microeconomics Problem Set 2 1/20/10
Dirk Bergemann Department of Economics Yale University s by Olga Timoshenko Economics 121b: Intermediate Microeconomics Problem Set 2 1/20/10 This problem set is due on Wednesday, 1/27/10. Preliminary
More informationEconomics 326: Duality and the Slutsky Decomposition. Ethan Kaplan
Economics 326: Duality and the Slutsky Decomposition Ethan Kaplan September 19, 2011 Outline 1. Convexity and Declining MRS 2. Duality and Hicksian Demand 3. Slutsky Decomposition 4. Net and Gross Substitutes
More informationConstrained Optimisation
CHAPTER 9 Constrained Optimisation Rational economic agents are assumed to make choices that maximise their utility or profit But their choices are usually constrained for example the consumer s choice
More informationThe Central Idea CHAPTER 1 CHAPTER OVERVIEW CHAPTER REVIEW
CHAPTER 1 The Central Idea CHAPTER OVERVIEW Economic interactions involve scarcity and choice. Time and income are limited, and people choose among alternatives every day. In this chapter, we study the
More informationUtility. M. Utku Ünver Micro Theory. M. Utku Ünver Micro Theory Utility 1 / 15
Utility M. Utku Ünver Micro Theory M. Utku Ünver Micro Theory Utility 1 / 15 Utility Function The preferences are the fundamental description useful for analyzing choice and utility is simply a way of
More informationChapter 21: The Discounted Utility Model
Chapter 21: The Discounted Utility Model 21.1: Introduction This is an important chapter in that it introduces, and explores the implications of, an empirically relevant utility function representing intertemporal
More informationName: ID: Discussion Section:
Math 28 Midterm 3 Spring 2009 Name: ID: Discussion Section: This exam consists of 6 questions: 4 multiple choice questions worth 5 points each 2 hand-graded questions worth a total of 30 points. INSTRUCTIONS:
More information1. a. Interest-bearing checking accounts make holding money more attractive. This increases the demand for money.
Macroeconomics ECON 2204 Prof. Murphy Problem Set 4 Answers Chapter 10 #1, 2, and 3 (on pages 308-309) 1. a. Interest-bearing checking accounts make holding money more attractive. This increases the demand
More informationor, put slightly differently, the profit maximizing condition is for marginal revenue to equal marginal cost:
Chapter 9 Lecture Notes 1 Economics 35: Intermediate Microeconomics Notes and Sample Questions Chapter 9: Profit Maximization Profit Maximization The basic assumption here is that firms are profit maximizing.
More informationECON 103, 2008-2 ANSWERS TO HOME WORK ASSIGNMENTS
ECON 103, 2008-2 ANSWERS TO HOME WORK ASSIGNMENTS Due the Week of June 23 Chapter 8 WRITE [4] Use the demand schedule that follows to calculate total revenue and marginal revenue at each quantity. Plot
More informationElasticity. I. What is Elasticity?
Elasticity I. What is Elasticity? The purpose of this section is to develop some general rules about elasticity, which may them be applied to the four different specific types of elasticity discussed in
More informationChapter 3. The Concept of Elasticity and Consumer and Producer Surplus. Chapter Objectives. Chapter Outline
Chapter 3 The Concept of Elasticity and Consumer and roducer Surplus Chapter Objectives After reading this chapter you should be able to Understand that elasticity, the responsiveness of quantity to changes
More informationELASTICITY Microeconomics in Context (Goodwin, et al.), 3 rd Edition
Chapter 4 ELASTICITY Microeconomics in Context (Goodwin, et al.), 3 rd Edition Chapter Overview This chapter continues dealing with the demand and supply curves we learned about in Chapter 3. You will
More informationChapter 4 NAME. Utility
Chapter 4 Utility NAME Introduction. In the previous chapter, you learned about preferences and indifference curves. Here we study another way of describing preferences, the utility function. A utility
More informationDEMAND FORECASTING. Demand. Law of Demand. Definition of Law of Demand
DEMAND FORECASTING http://www.tutorialspoint.com/managerial_economics/demand_forecasting.htm Copyright tutorialspoint.com Demand Demand is a widely used term, and in common is considered synonymous with
More informationChapter 4 Individual and Market Demand
Chapter 4 Individual and Market Demand Questions for Review 1. Explain the difference between each of the following terms: a. a price consumption curve and a demand curve The price consumption curve (PCC)
More informationECON 443 Labor Market Analysis Final Exam (07/20/2005)
ECON 443 Labor Market Analysis Final Exam (07/20/2005) I. Multiple-Choice Questions (80%) 1. A compensating wage differential is A) an extra wage that will make all workers willing to accept undesirable
More informationCOST THEORY. I What costs matter? A Opportunity Costs
COST THEORY Cost theory is related to production theory, they are often used together. However, the question is how much to produce, as opposed to which inputs to use. That is, assume that we use production
More informationChapter 21: Consumer Behavior and Utility Maximization
Chapter : Consumer Behavior and Utility Maximization ANSWERS TO END-OF-CHAPTER QUESTIONS - Explain the law of demand through the income and substitution effects, using a price increase as a point of departure
More informationReview of Fundamental Mathematics
Review of Fundamental Mathematics As explained in the Preface and in Chapter 1 of your textbook, managerial economics applies microeconomic theory to business decision making. The decision-making tools
More informationLearning Objectives. Essential Concepts
Learning Objectives After reading Chapter 3 and working the problems for Chapter 3 in the textbook and in this Workbook, you should be able to: Employ marginal analysis to find the optimal levels of activities
More informationPPA 723, Fall 2006 Professor John McPeak
Quiz One PPA 723, Fall 2006 Professor John McPeak Name: The total quiz is worth 20 points. Each question is worth 2 points, and each sub question is worth an equal share of the two points. 1) The demand
More informationSample Midterm Solutions
Sample Midterm Solutions Instructions: Please answer both questions. You should show your working and calculations for each applicable problem. Correct answers without working will get you relatively few
More informationc. Given your answer in part (b), what do you anticipate will happen in this market in the long-run?
Perfect Competition Questions Question 1 Suppose there is a perfectly competitive industry where all the firms are identical with identical cost curves. Furthermore, suppose that a representative firm
More informationCHAPTER 7: CONSUMER BEHAVIOR
CHAPTER 7: CONSUMER BEHAVIOR Introduction The consumer is central to a market economy, and understanding how consumers make their purchasing decisions is the key to understanding demand. Chapter 7 explains
More informationName Eco200: Practice Test 2 Covering Chapters 10 through 15
Name Eco200: Practice Test 2 Covering Chapters 10 through 15 1. Four roommates are planning to spend the weekend in their dorm room watching old movies, and they are debating how many to watch. Here is
More informationStudy Questions for Chapter 9 (Answer Sheet)
DEREE COLLEGE DEPARTMENT OF ECONOMICS EC 1101 PRINCIPLES OF ECONOMICS II FALL SEMESTER 2002 M-W-F 13:00-13:50 Dr. Andreas Kontoleon Office hours: Contact: a.kontoleon@ucl.ac.uk Wednesdays 15:00-17:00 Study
More informationElements of a graph. Click on the links below to jump directly to the relevant section
Click on the links below to jump directly to the relevant section Elements of a graph Linear equations and their graphs What is slope? Slope and y-intercept in the equation of a line Comparing lines on
More information1 Uncertainty and Preferences
In this chapter, we present the theory of consumer preferences on risky outcomes. The theory is then applied to study the demand for insurance. Consider the following story. John wants to mail a package
More informationOne Period Binomial Model
FIN-40008 FINANCIAL INSTRUMENTS SPRING 2008 One Period Binomial Model These notes consider the one period binomial model to exactly price an option. We will consider three different methods of pricing
More informationNotes on indifference curve analysis of the choice between leisure and labor, and the deadweight loss of taxation. Jon Bakija
Notes on indifference curve analysis of the choice between leisure and labor, and the deadweight loss of taxation Jon Bakija This example shows how to use a budget constraint and indifference curve diagram
More informationUsing Proportions to Solve Percent Problems I
RP7-1 Using Proportions to Solve Percent Problems I Pages 46 48 Standards: 7.RP.A. Goals: Students will write equivalent statements for proportions by keeping track of the part and the whole, and by solving
More informationU = x 1 2. 1 x 1 4. 2 x 1 4. What are the equilibrium relative prices of the three goods? traders has members who are best off?
Chapter 7 General Equilibrium Exercise 7. Suppose there are 00 traders in a market all of whom behave as price takers. Suppose there are three goods and the traders own initially the following quantities:
More informationSimple Model Economy. Business Economics Theory of Consumer Behavior Thomas & Maurice, Chapter 5. Circular Flow Model. Modeling Household Decisions
Business Economics Theory of Consumer Behavior Thomas & Maurice, Chapter 5 Herbert Stocker herbert.stocker@uibk.ac.at Institute of International Studies University of Ramkhamhaeng & Department of Economics
More information1.3 LINEAR EQUATIONS IN TWO VARIABLES. Copyright Cengage Learning. All rights reserved.
1.3 LINEAR EQUATIONS IN TWO VARIABLES Copyright Cengage Learning. All rights reserved. What You Should Learn Use slope to graph linear equations in two variables. Find the slope of a line given two points
More informationEconomic Principles Solutions to Problem Set 1
Economic Principles Solutions to Problem Set 1 Question 1. Let < be represented b u : R n +! R. Prove that u (x) is strictl quasiconcave if and onl if < is strictl convex. If part: ( strict convexit of
More informationChoice under Uncertainty
Choice under Uncertainty Part 1: Expected Utility Function, Attitudes towards Risk, Demand for Insurance Slide 1 Choice under Uncertainty We ll analyze the underlying assumptions of expected utility theory
More informationUTILITY AND DEMAND. Chapter. Household Consumption Choices
Chapter 7 UTILITY AND DEMAND Household Consumption Choices Topic: Consumption Possibilities 1) The level of utility a consumer can achieve is limited by A) prices only. B) income only. C) the consumer
More informationANSWER KEY 3 UTILITY FUNCTIONS, THE CONSUMER S PROBLEM, DEMAND CURVES
ANSWER KEY 3 UTILITY FUNCTIONS, THE CONSUMER S PROBLEM, DEMAND CURVES ECON 210 (1) Perfect Substitutes. Suppose that Jack s utility is entirely based on number of hours spent camping (c) and skiing (s).
More informationMULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
Econ 201 Practice Test 1 Professor V. Tremblay MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Scarcity can best be defined as a situation in which:
More informationProblem Set 2: Solutions ECON 301: Intermediate Microeconomics Prof. Marek Weretka. Problem 1 (Marginal Rate of Substitution)
Proble Set 2: Solutions ECON 30: Interediate Microeconoics Prof. Marek Weretka Proble (Marginal Rate of Substitution) (a) For the third colun, recall that by definition MRS(x, x 2 ) = ( ) U x ( U ). x
More informationOur development of economic theory has two main parts, consumers and producers. We will start with the consumers.
Lecture 1: Budget Constraints c 2008 Je rey A. Miron Outline 1. Introduction 2. Two Goods are Often Enough 3. Properties of the Budget Set 4. How the Budget Line Changes 5. The Numeraire 6. Taxes, Subsidies,
More informationName: Date: 3. Variables that a model tries to explain are called: A. endogenous. B. exogenous. C. market clearing. D. fixed.
Name: Date: 1 A measure of how fast prices are rising is called the: A growth rate of real GDP B inflation rate C unemployment rate D market-clearing rate 2 Compared with a recession, real GDP during a
More informationThe Point-Slope Form
7. The Point-Slope Form 7. OBJECTIVES 1. Given a point and a slope, find the graph of a line. Given a point and the slope, find the equation of a line. Given two points, find the equation of a line y Slope
More information3. George W. Bush is the current U.S. President. This is an example of a: A. Normative statement B. Positive statement
Econ 3144 Fall 2006 Test 1 Dr. Rupp Name Sign Pledge I have neither given nor received aid on this exam Multiple Choice Questions (3 points each) 1. What you give up to obtain an item is called your A.
More informationANSWERS TO END-OF-CHAPTER QUESTIONS
ANSWERS TO END-OF-CHAPTER QUESTIONS 9-1 Explain what relationships are shown by (a) the consumption schedule, (b) the saving schedule, (c) the investment-demand curve, and (d) the investment schedule.
More informationMath 1526 Consumer and Producer Surplus
Math 156 Consumer and Producer Surplus Scenario: In the grocery store, I find that two-liter sodas are on sale for 89. This is good news for me, because I was prepared to pay $1.9 for them. The store manager
More informationTheory of Demand. ECON 212 Lecture 7. Tianyi Wang. Winter 2013. Queen s Univerisity. Tianyi Wang (Queen s Univerisity) Lecture 7 Winter 2013 1 / 46
Theory of Demand ECON 212 Lecture 7 Tianyi Wang Queen s Univerisity Winter 2013 Tianyi Wang (Queen s Univerisity) Lecture 7 Winter 2013 1 / 46 Intro Note: Quiz 1 can be picked up at Distribution Center.
More informationLinear Programming. Solving LP Models Using MS Excel, 18
SUPPLEMENT TO CHAPTER SIX Linear Programming SUPPLEMENT OUTLINE Introduction, 2 Linear Programming Models, 2 Model Formulation, 4 Graphical Linear Programming, 5 Outline of Graphical Procedure, 5 Plotting
More informationUC Berkeley Haas School of Business Economic Analysis for Business Decisions (EWMBA 201A)
UC Berkeley Haas School of Business Economic Analysis for Business Decisions (EWMBA 201A) The economic agent (PR 3.1-3.4) Standard economics vs. behavioral economics Lectures 1-2 Aug. 15, 2009 Prologue
More informationGraphing calculators Transparencies (optional)
What if it is in pieces? Piecewise Functions and an Intuitive Idea of Continuity Teacher Version Lesson Objective: Length of Activity: Students will: Recognize piecewise functions and the notation used
More informationUnderstanding the Slutsky Decomposition: Substitution & Income Effect
Understanding the Slutsky Decomposition: Substitution & Income Effect age 1 lacement of the Final Bundle when p : Substitute or Complement Goods? egion A egion B egion C BC 2 S When p, BC rotates inwards
More information4 THE MARKET FORCES OF SUPPLY AND DEMAND
4 THE MARKET FORCES OF SUPPLY AND DEMAND IN THIS CHAPTER YOU WILL Learn what a competitive market is Examine what determines the demand for a good in a competitive market Chapter Overview Examine what
More information3.3 Applications of Linear Functions
3.3 Applications of Linear Functions A function f is a linear function if The graph of a linear function is a line with slope m and y-intercept b. The rate of change of a linear function is the slope m.
More informationDemand and Consumer Behavior emand is a model of consumer behavior. It attempts to identify the factors
R. Larry Reynolds Demand and Consumer Behavior R. Larry Reynolds (005) Demand and Consumer Behavior emand is a model of consumer behavior. It attempts to identify the factors D that influence the choices
More informationCHAPTER 5 WORKING WITH SUPPLY AND DEMAND Microeconomics in Context (Goodwin, et al.), 2 nd Edition
CHAPTER 5 WORKING WITH SUPPLY AND DEMAND Microeconomics in Context (Goodwin, et al.), 2 nd Edition Chapter Overview This chapter continues dealing with the demand and supply curves we learned about in
More informationMaking the Indifference-Curve Approach to Excess Burden More Understandable
Making the Indifference-Curve Approach to Excess Burden More Understandable Gregory A. Trandel Department of Economics University of Georgia June 2008 Abstract: This paper presents a simple method by which
More informationWalrasian Demand. u(x) where B(p, w) = {x R n + : p x w}.
Walrasian Demand Econ 2100 Fall 2015 Lecture 5, September 16 Outline 1 Walrasian Demand 2 Properties of Walrasian Demand 3 An Optimization Recipe 4 First and Second Order Conditions Definition Walrasian
More informationChapter 27: Taxation. 27.1: Introduction. 27.2: The Two Prices with a Tax. 27.2: The Pre-Tax Position
Chapter 27: Taxation 27.1: Introduction We consider the effect of taxation on some good on the market for that good. We ask the questions: who pays the tax? what effect does it have on the equilibrium
More informationThe Cobb-Douglas Production Function
171 10 The Cobb-Douglas Production Function This chapter describes in detail the most famous of all production functions used to represent production processes both in and out of agriculture. First used
More informationChapter 10. Consumer Choice and Behavioral Economics
Chapter 10. Consumer Choice and Behavioral Economics Instructor: JINKOOK LEE Department of Economics / Texas A&M University ECON 202 504 Principles of Microeconomics Utility Utility: the satisfaction people
More information01 In any business, or, indeed, in life in general, hindsight is a beautiful thing. If only we could look into a
01 technical cost-volumeprofit relevant to acca qualification paper F5 In any business, or, indeed, in life in general, hindsight is a beautiful thing. If only we could look into a crystal ball and find
More informationPricing I: Linear Demand
Pricing I: Linear Demand This module covers the relationships between price and quantity, maximum willing to buy, maximum reservation price, profit maximizing price, and price elasticity, assuming a linear
More informationPrice Elasticity of Supply; Consumer Preferences
1 Price Elasticity of Supply 1 14.01 Principles of Microeconomics, Fall 2007 Chia-Hui Chen September 12, 2007 Lecture 4 Price Elasticity of Supply; Consumer Preferences Outline 1. Chap 2: Elasticity -
More informationUtility Maximization
Utility Maimization Given the consumer's income, M, and prices, p and p y, the consumer's problem is to choose the a ordable bundle that maimizes her utility. The feasible set (budget set): total ependiture
More informationChapter 5 End of Chapter Review Question KEY
Chapter End of Chapter Review Question KEY - (Key Question) Complete the following table and answer the questions below: Units consumed Total utility Marginal utility 0 0 0 0 0 a. At which rate is total
More informationIncreasing for all. Convex for all. ( ) Increasing for all (remember that the log function is only defined for ). ( ) Concave for all.
1. Differentiation The first derivative of a function measures by how much changes in reaction to an infinitesimal shift in its argument. The largest the derivative (in absolute value), the faster is evolving.
More information