ECO 211 Chapter 5: Full Chapter Notes

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ECO 211 Full Course Notes

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Chapter 5 notes: the buyer"s problem has three parts: what you like, prices, and your budget, what you like: Opportunity cost jeans = loss in sweaters/ gain in jeans. Opportunity cost sweater = loss in jeans/ gain in sweaters: you should spend each additional dollar on the good for which your marginal benefits per dollar spent are the largest. Furthermore, the higher the price, the lower the quantity demanded: reservation price the price that you are willing to pay, elasticity the measure of sensitivity of one variable to a change in another. It tells us how much one variable changes when another changes. Cross-price elasticity = (percentage change in quantity demanded of good x)/ (percentage change in price of good y) If a cross-price elasticity is negative, then the two goods are complements. If a cross-price elasticity is positive, then the two goods are substitutes.

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budget line

marginal utility

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market demand

consumption bundle

substitution effect

Giffen good

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income effect

transitive property of preferences

indifference curves

utility

the marginal rate of substitution

utility function

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

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

a) If utility is given by u(x; y) = x + y, are the tastes represented homothetic? Are the tastes quasi-linear? Explain.

b) Donald says that since all consumers face the same prices, their budget constraints all have the same slope, and so they should all consume roughly the same quantities of goods if their incomes were the same. Barry disagrees. Who is right and why?

suppose you are given a coupon for pizza. This coupon lowers the price for each additional pizza you buy by 5%. What happens to your budget constraint (compared to the budget with no coupon). Explain.

lilacotter512

ECO 211 Chapter 5: Full Chapter Notes

ECO 211 Full Course Notes

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