ECON 1B03 Lecture Notes - Lecture 31: Indifference Curve, Budget Constraint

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carminedolphin665

11 Apr 2016

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Consumer is able to choose better combo of goods on higher indifference curve changes in prices of goods will change bc and optimal bundle. Suppose price of basketball tickets falls, budget line will rotate out along basketball axis. Income effect change in consumption that results when price change moves consumer to higher or lower indifference curve. Substitution effect change in consumption that results when price change moves consumer along indifference curve to point with different marginal rate of substitution. We get from a to b by substituting the cheaper bb tickets for hockey tickets to maintain same utility level. We get from b to c because decrease in price of bb tickets increases our purchasing power so we can consume on higher indifference curve. When price of basketball tickets decreases, you substitute for now more expensive hockey tickets. When price of bb tickets decreases, purchasing power increases which leads to a higher budget line.

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1.	_____	The satisfaction or benefit that consumers receive from consuming goods or services.
2.	________________ _	A particular combination of specific quantities of goods or services
3.	________________ _	Consumers can rank all conceivable bundles of goods or services
4.	_____	If A is preferred to B, and B is preferred to C, then A is always preferred to C.
5.	_____	Equation showing a consumerâs perception of the total utility forthcoming from consuming each bundle of goods and services.
6.	_____	A set of consumption bundles each and every one of which provides a consumer with exactly the same level of total utility.
7.	_____	The number of units of Y that must be given up for total utility to remain the same when one more unit of X is consumed.
8.	_____	The addition to total utility attributable to consuming one more unit of a good, holding the consumption of all other goods constant.
9.	_____	The line showing all bundles of goods that can be purchased at given prices if the entire income is spent.
10.	_____	The change in the consumption of a good that would result if the consumer remained on the original indifference curve after the price of the good changes.
11.	_____	The change in consumption of goods results strictly from the change in purchasing power after the price of a good changes.
12.	________________ _	The sum of the substitution and income effects.
13.	_____	A good for which quantity demanded varies directly with price, causing an upward sloping demand curve.
14.	_____	A list of prices and the corresponding quantity consumers are willing and able to purchase at each price.

blushwildebeest943

Currently, the price of consuming housing x1 is lowered by the fact that home mortgage interest is tax deductible. Suppose the government proposed to eliminate this implicit subsidy of your housing consumption, raising the price from (p1-s) to p1. At the same time, the government lowers the tax on other consumption x2, lowering the price from (p2 + t) to p2.

a) Write down your original budget constraint assuming the consumer has income I.

b) Suppose the utility function u(x1, x2) = (1/3) lnx1 +lnx2 captures your tastes, and suppose I = 10, 000,

p1 = 10, p2 = 1, s = 6, and t = 1. Write out the utility maximization problem for this consumer

prior to any policy change.
c) How much housing and other goods will this consumer consume prior to any policy change? (show process)

d) When the policy change goes into effect, will this consumer still be able to afford the bundle you derived in (c)?

e) When the policy change goes into effect, what bundle will the consumer consume?

coralbuffalo772

1.The Phillie Phanatic always eats his ballpark frank in a special way; he uses a foot-long hot dog together with precisely half a bun, 1 ounce of mustard, and 2 ounces of pickle relish. He only gains utility/satisfaction from these 4 items, any extra of a single item without the others is worthless.

What can we say about the relationship among these goods for the Phillie Phanatic and the shape of his indifference curve with respect to these goods?

2. Consider a person with convex indifference curves. When she optimally chooses a consumption bundle of a particular amount of fruit on the Y-axis, and vegetables on the X-axis, her marginal rate of substitution equals:

A. 1

B. PV_/PF (The price of vegetables divided by the price of fruit)

C. P_F/P_V (The price of fruit divided by the price of vegetables)

D. 0

3. A consumer has a budget for food (F) and shelter (S). With income M, and prices PF and PS, the budget constraint for this consumer may be represented as:

A. PSS + PFF = M

B. F = M/PF - (PS/PF)S

C. S = M/PS - (PF/PS)F

D. All of the above

burgundyalpaca580

ECON 1B03 Lecture Notes - Lecture 31: Indifference Curve, Budget Constraint

ECON 1B03 Full Course Notes

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