ECN 600 Chapter Notes - Chapter 4: Barter, Budget Constraint, Utility

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azurecrocodile180

27 Nov 2017

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Where u is the utility function, c is the quantity of consumption, and l is the quantity of leisure. bundle that contains more consumption, more leisure, or both: the actual level of utility, however, is irrelevant. In a barter economy, all trade involves exchanges of goods for goods: the time constraint for the consumer is; l+ns=h. l being leisure time and ns being labour supply or time spent working. The consumer"s real disposable income: consumer"s real disposable income wage income plus dividend income, labour time is sold by the consumer in the labour market at a price w in minus taxes terms of consumption goods. That is, one unit of labour time exchanges for w units of consumption goods. In general, the relative price of a good x in terms of a good y is the number of units of y that trade for a unit of x.

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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

Suppose that there are two goods (X and Y). The price of X is $2 per unitu, and the price of Y is $1 per unit. There are two consumers ( A and B). The utility functions for the consumers are: for consumer A: U (X,Y)= X^.5Y^.5 and for consumer B: U(X,Y)=X^.8Y^.2

Consumer A has an income of $100, and Consumer B has an income of $300.

1. Derive the marginal utlities of goods X and Y for consumer A

2. Derive the marginal utilities of goods X and Y for consumer B

3. Set consumer A's MRS equal to the price ratio. Then use the budget constraint to solve for her optimal bundle

4. Set consumer B's MRS equal to the price ratio. Then use the budget contraint to solve for his optimal consumption bundle.

5. Calculate the MRS for each consumer at their optimal consumption bundles.

6. Suppose that there is another conusmer (let's call her C). You don't know anything about her utility function or her income. All you know is that she consumes both goods. What do you know about C's MRS at her optimal consumption bundle? Why?

crimsonbat715

Woody lives in Houston, and works at a college restaurant where the minimum wage per hour, w, is paid. The current minimum wage rate per hour is $8. Woody allocates his daily hours either for working or for leisure. That is, for the total 24 hours he has a day, he can choose to work (denoted as H), or do other things (denoted as L). If he works, all the money he earns, w x H, is spent on his consumption. Saving is not poosible. Both consumption and leisure are goods for him.

Woody's utility function is
U(L,C)= Squre root of CL²
MU_C=L/(2*Square root of C)
MU_L=Sqaure root of C

a) Derive Woody's MRS function. What is the MRS at (L,C) = (20,32)? State the meaning of MRS in terms of leisure and consumption.

b) Derive Woody's budget constraint equation. (Hint: C=w x H, and the total hours a day is 24)

c) What is Woody's optimal (L^*,C^*) and utility level U^*? How many hours does Woody work each day? Clearly state the utility maximization condition.

ECN 600 Chapter Notes - Chapter 4: Barter, Budget Constraint, Utility

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