Economics 1021A/B Lecture Notes - Indifference Curve, Substitute Good, Divisor

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ECON 1021A/B Full Course Notes

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Budget line limits to consumer choices. Divisible bought in any quantity desired (gas, electricity) Budget line marks what is affordable and not affordable. Afford anything on budget line and below it. Cannot afford anything outside of the line. Expenditure ([price x quantity] of each good) = income. Income expressed as a quantity of goods that the household can afford to buy. Money income / price of the good. Price of one good divided by the price of another good. Slope = change in the variable measured on the y-axis / change in the variable measured on the x-axis. Lower the price of the good on x-axis, flatter is the budget line: afford more. Higher price on x-axis, steeper the line: afford less. A change in money income changes real income but does not change the relative price. Increases in money, increase real income, shift budget line right. Decrease in money income, decrease real income, shift left.

Related Questions

Consider an individual making choices over two goods, x and y with prices px and py, and who has income:

Suppose that, as a result of changes in the individual's economic circumstances, the budget line rotates outward, with the vertical (good y) intercept remaining unchanged but the horizontal (good x) intercept shifting to the right. Explain how this could have happened if the price of good x did not change?

If the individual's utility function is u(x; y) = x 2 + 4y 2 , are these preferences convex? Are they monotonic? Explain.

coffeegnu443

Over the past decade, medical costs have increased more rapidly than other prices. In order to illustrate how rising medical costs have affected consumer alternatives, let X represent the quantity of medical services, and let Y represent the quantity of other goods. Furthermore, let income (M) be measured in hundreds of dollars, the price of medical services and other goods in terms of dollars per minute, with M = 100, Px = 4, and Py = 5.

a. Graph the budget line, and determine the market rate of substitution.

b. Illustrate the budget set.

c. Show in your graph what happens to the budget constraint if Px increases to $10.

d. What is the meaning of the slope of the two budget constraints?

lemonpug392

Respond True or False to the following, and explain why each answer is True or False:

a. If two goods x and y are perfect complements, then if the price of x falls, the entire change in demand for x is due to the income effect.

b. A consumer has the utility function given by U=min{x1,2x2}. If good 2, has a price of zero, the consumer will always strictly prefer more of good 2 to less.

c. Ivan spends his entire income on two goods. One of them is a Giffen good. If the price of the Giffen good rises, demand for the other good must fall.

d. Jimmy's utility function is U(a,b) = ab, where a is his consumption of apples and b is his consumption of bananas. If prices and income change in such a way that Jimmy's old consumption bundle lies on his new budget line, then Jimmy will not change his consumption bundle.

blueantelope865

Economics 1021A/B Lecture Notes - Indifference Curve, Substitute Good, Divisor

ECON 1021A/B Full Course Notes

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