CAS EC 101 Lecture Notes - Lecture 6: Budget Constraint, Regional Policy Of The European Union, Indifference Curve
1 May 2018
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CHAPTER 10: THE CONSUMER THEORY (PRACTICE PROBLEMS)
What is on the exam?
• Demand
• Supply
• Comparative Statics
• Elasticity
• Price Controls (ceilings and floors)
• Consumer Theory (indifference curves, budget constraints, consumer optimum)
Review notes, power point slides, practice sets
Read questions carefully
Objective 1: Practice Problem: Discrete Utility
• Discrete v. Continuous
• Discrete – a quantitative variable that has a finite/countable number of possible values
o CANNOT take on every value between the number of possible values
o ex: 0, 1, 2, 3…
o ex: number of children
• Continuous – a quantitative variable that has an infinite number of possible values
o CAN take on every value between the number of possible values
o ex: 0, 0.1, 0.2, 0.3, 0.4, 0.5…
o ex: household income, daily intake of whole grains
• ex: Jo is trying to decide how many books and how many movies to consume each
month. She has $136 to spend on the two goods. Movies are $8 each and books are $20
each. Each good can only be purchased in whole numbers. Jo’s preferences are
summarized in each table below.
o a. Fill in the figures for marginal utility and marginal utility per dollar spent for
both movies and books.
Movies:
# Per Month
Total Utility
Marginal Utility
MU/$
1
50
50
6.25
2
80
30
3.75
3
100
20
2.50
4
110
10
1.25
5
116
6
0.75
6
121
5
0.63
7
123
2
0.25
Books:
# Per Month
Total Utility
Marginal Utility
MU/$
1
22
22
1.1
2
42
20
1.00
3
52
10
0.50
4
57
5
0.25
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Document Summary
What is on the exam: demand, supply, comparative statics, elasticity, price controls (ceilings and floors, consumer theory (indifference curves, budget constraints, consumer optimum) She has to spend on the two goods. Movies are each and books are each. Each good can only be purchased in whole numbers. Jo"s preferences are summarized in each table below: a. Fill in the figures for marginal utility and marginal utility per dollar spent for both movies and books. 1: yes, because marginal utility is decreasing, c. given her budget of , what quantity of books and movies will maximize. Jo"s utility: (cid:3040)(cid:3034)(cid:3041)(cid:3039) (cid:3048)(cid:3047)(cid:3039)(cid:3047) (cid:3042)(cid:3033) (cid:3034)(cid:3042)(cid:3042)(cid:3031) (cid:3025) (cid:3043)(cid:3030)(cid:3032) (cid:3042)(cid:3033) (cid:3034)(cid:3042)(cid:3042)(cid:3031) (cid:3025) Optimal consumption bundle (x*, y*) must be on the budget constraint: consumption, 2. Objective 2: practice problem: finding the consumer optimum: ex: michael jordan has only two goods he buys basketballs and gatorade. Point a on the graph represents jordan"s optimal consumption point given these prices and his income: a.
