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ECON 20000 Study Guide - Midterm Guide: Inferior Good, Real Interest Rate, Intertemporal Choice

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School
University of Chicago
Department
Economics
Course
ECON 20000
Professor
Li

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Document Summary

Endowment economy is not on the exam. Change in x/change in p = price effect. Change in x^k/change in p = substitution effect. (change in x^m/change in m)x = income effect. Change in x^k is the change in demand due to substitution effect. X^f-x^k = the change in demand due to the income effect (x^k-x^0)/(p1-p0) = substitution effect. X^f-x^0 = x^f-x^k+x^k-x^0 (x^f-x^k)/(p1-p0) = income effect. *change in x^i/change in p = >0/<0 = negative. **if the good is giffen where price effect is positive, it must be an inferior good. ***if inferior good with negative price effect, the good is ordinary. ****special cases not necessarily included; consider during studies. Law of demand: if normal px increases, demand decreases ordinary. X^f-x^0/p1-p2 = x^f-x^k/p1-p0 + x^k-x^0/p1-p0: price effect = income effect + substitution effect. Marginal rate of substitution: amount of y that you"re willing to pay for a marginal increase in x.

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Related Questions

1. A factor demand curve will shift because of

A. a change in the price of a complementary factor

B. the slope of the MP curve

C. the elasticity of demand for the final product

D. the proportion of the factor's cost relative to the total cost

2. Which of the following statements is true

A. The market demand for labor will change as a result of a change in the use of a complementary factor or a substitute factor

B. The market demand curve for labor is found by adding the supply curves for the labor of individual firms

C. A firm's demand for labor is the upward-sloping portion of the MRP curve for labor.

D. The market demand curve for labor is vertical at the profit-maximizing wage.

3. Which of the following statements is true

A. Leisure is a normal good.

B. Leisure is an inferior good.

C. All other things unchanged, an increase in income will decrease the demand for leisure.

D. The demand for leisure is perfectly inelastic.

4. A lower wage

A. has an income effect which is always negative for the quantity of labor supplied.

B. has an income effect but not a substitution effect on the quantity of labor supplied.

C. means a higher income for any given level of labor supplied.

D. has an income effect which is always positive for the quantity of labor supplied.

5. The _______ effect of a _______ wage causes individuals to substitute _______

A. substitution, higher; labor for leisure

B. income; higher; labor for leisure

C. substitution; lower; labor for leisure

D. complementary; constant; leisure for labor

Suppose that the extended (generalized) demand function for good Y is:

QdY= 250,000 - 500 PY -1.5 M + 240 PX

where: QdY = quantity demanded of good Y

PY = Price of good Y

M = Average income of consumers

PX = Price of related good X

a) If M = $ 60,000 and PX = $100, what is the reduced demand function for good Y?

b) Continue using the reduced demand equation from part a,

If M = $60,000, PX = $100, and PY = $200 then QdY = ________

If M = $60,000, PX = $100, and PY = $300 then QdY = ________

Use this information (prices and quantities demanded of good Y) to calculate the price elasticity of demand between these two points on the demand curve of good Y. Show your work.

c) Use your answer to part b. Between these two points on the demand for good Y, is demand elastic, inelastic, or unitary price elastic? Why? What will happen to total revenues if the price increases between these two points on the demand curve?

d) In part b, you found that when:

M = $60,000, PX = $100, and PY = $200 then QdY = ________

Now let's suppose that the price of the related good X decreases from $100 to $50 but income remains constant (at $60,000). Assume that the price of good Y is also constant at $200.

If M = $60,000, PX = $50, and PY = $200 then QdY = ________

Use these prices of good X and the quantities demanded of good Y to calculate the cross-price elasticity of the demand for good Y when the price of good X decreases from $100 to $50.

e) Consider your answer to part d. Based on the value of the cross-price elasticity of demand you just estimated, are goods X and Y substitutes, complements, or unrelated? Why?

f) In part b, you found that when:

M = $60,000, PX = $100, and PY = $200 then QdY = ________

Now let's suppose that consumer income increases from $60,000 to $80,000 but the price of good X remains constant (at $100). Assume that the price of good Y is also constant at $200.

If M = 80,000 , PX = $100 and PY = $200 then QdY = _________

Use these income levels and quantities demanded of good Y to calculate the income elasticity of the demand for good Y when income increases from $60,000 to $80,000.

Show your work

g) Consider your answer to part f. Based on the value of the income elasticity of demand you just estimated, is good Y normal, inferior, or income independent?

2. Plot the initial budget line Blo, the new budget line BL1 and the compensated budget line BLC after the price of X, increases. Then, plot the substitution effect SE, the income effect IE, and the total effect TE for each of the two consumers according to their indifference curves. Please note that the focus of this question is not on finding the exact quantities of each good that these consumers would be purchasing before and after the price change. (30 marks) 2. (a) Adam lives in Australia and his income is 300. Initially, the price of X, is 6 and the price of X2 is 10. Then, the price of xı increases to 12 while the price of X2 and his income remain unchanged. Use your findings on SE, IE, TE, and lecture discussion to help you explain whether (i) X1 is a normal good and (ii) the demand curve for Xi is downward-sloping (13 marks) 40 0 5 10 15 20 25 30 35 40 45 50 x1 2. (b) Beatrice lives in Barbados and her income is 700. Initially, the price of Xi is 7 and the price of xz is 10. Then, the price of Xı increases to 14 while the price of x2 and her income remain unchanged. Use your findings on SE, IE, TE, and lecture discussion to help you explain whether (i) x1 is a normal good and (ii) the demand curve for Xi is downward- sloping. (14 marks) -U3 02 10 o 20 30 40 50 60 70 80 90 100 x;* 2. (c) Is Xi a Giffen good to Adam or Beatrice? What are the conditions for a good to become a Giffen good? (3 marks)