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ECON20002 Lecture Notes - Lecture 6: Indifference Curve, Engel Curve, Normal Good

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orchidgnu53
27 Jul 2018
School
University of Melbourne
Department
Economics
Course
ECON20002
Professor
Reshad Ahsan

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Document Summary

Optimal choice of x and y x* and y* Represent individual demand curves for x and y. Demand as a function of the price of the other good. Raising price of x means higher quantity demanded for y. Raising price of x means lower quantity demanded for y. Price of x doesn"t affect consumption of y. Determine the optimal consumption level for various income levels. Horizontal axis quantity demanded of a good. Price-consumption curve for any given price of a good, the curve tells the optimal consumption of that good. Can use the optimal baskets above to draw the individual demand curve. Individual demand curve relates the quantity of a good that a single consumer will buy, to the price of that good. For every point on the curve the consumer is maximising utility. Rewrite the demand function in terms of price. Every point on the demand curve the consumer maximises utility.

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Related Questions

The generalized demand and supply functions for good X are

Qd = 10 -2Px - 4PY + M Qs = 10 + 2PX

  Where:

    QD = quantity demanded of good X

     PX = price of good X

     M = consumer income 

     PY = price of good Y

 

 

    QS = quantity supplied of good X

    PX = price of good X

 

A. Are good X and good Y substitutes or complements? Why?

B. Is good X a normal good or an inferior good? Why?

C. What is the demand function when PY = $4 and M = $600?

d. Use the demand function you found in part c. and solve for the equilibrium price (Po) and the equilibrium quantity (Qo).

e. Find the inverse demand function and the inverse supply function.

f. Sketch this market.

3. The empirical demand function for good X is estimated in log-linear form as ln Q = 11.74209 - 1.65 ln P + 0.8 ln M - 2.5 ln PY where Q is the estimated number of units of good X demanded, P is the price of X, M is income, and PY is the price of related good Y. (All parameter estimates are significantly different from 0 at the 5 percent level.)

a. Is X a normal or an inferior good? Explain.

b. Are X and Y substitutes or complements? Explain.

c. Express the empirical demand function in the alternative (nonlogarithmic) form: Q=_______.

d. At P = 50, M = 36,000, and PY = 25, what are the estimated price, income, and cross-price elasticities? What is the predicted number of units of good X demanded?

The empirical demand function for good X is estimated in log-linear form as ln Q = 11.74209 - 1.65 ln P + 0.8 ln M - 2.5 ln PY where Q is the estimated number of units of good X demanded, P is the price of X, M is income, and PY is the price of related good Y. (All parameter estimates are significantly different from 0 at the 5 percent level.)

a. Is X a normal or an inferior good? Explain.

b. Are X and Y substitutes or complements? Explain.

c. Express the empirical demand function in the alternative (nonlogarithmic) form: Q =_______.

d. At P = 50, M = 36,000, and PY = 25, what are the estimated price (Ê), income (ÊM), and cross-price elasticities (ÊXY)? What is the predicted number of units of good X demanded?