ECON 100A Lecture Notes - Lecture 18: Utility Maximization Problem, Budget Constraint, Normal Good

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Published on 3 Nov 2016
School
UCSD
Department
Economics
Course
ECON 100A
ECON 100A
Price of good 1 decreases
- e1 to e2
- substitution effect (unambiguous)
- correspond to a compensated change in p1
- old utility and new price
- draw a blue line
- e2 to e3
- income effect (ambiguous)
- Graphic Representation
-
- What goods are good 1 and good 2
o Comparing e2 and e3 (income effect)
o as price of good 1 decreases, e3 is further right and further above of
e2
o good 1 and good 2 are normal goods
Price of good 1 increases
- e1 to e2
- substitution effect
- old utility and new price
- draw the blue line
- given that good 1 is inferior and good 2 is normal
- as income decreases, quantity for good 1 has to increase (inferior)
- as income decreases, quantity for good 2 has to decrease (normal)
- e2 to e3
- income effect
- Graphical Representation
-
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