review1

review1 - Midterm Review USC Marshall Overview Consumer...

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idterm Review Midterm Review USC Marshall
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Overview Consumer choice – Utility maximization and competitive demand – Choice under uncertainty Producer choice – Profit maximization and competitive supply Competitive markets p – Equilibrium and efficiency – Failure of competitive markets in the presence of externalities Government USC Marshall – Taxes and subsidies
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Consumer choice Consumer preferences – How a consumer would rank consumption bundles if given the opportunity to choose among them • Better-than, equal, worse-than Consumer constraints – Consumer choice is constrained by the income available and the prices of different goods • Preferences + constraints Æ optimal choice of consumption USC Marshall
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Consumer preferences A utility function – A preference ordering U U X , Y An indifference curve – Consumption bundles (combinations of X and Y ) p( ) that a consumer is indifferent between Marginal rate of substitution MRS X , Y MU X U – Describes how much the consumer values extra units of X relative to extra units of Y (given a MU Y particular initial ( X,Y )) – Describes how much Y should change to ompensate the consumer xactly r a given USC Marshall compensate the consumer exactly for a given change in X
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Consumer preferences Books USC Marshall CDs
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Consumer preferences Books I 1 USC Marshall CDs
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Consumer preferences Books I 1 "Better than" USC Marshall CDs
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Consumer preferences Books I 1 -slope at (CD 1 ,B 1 ) = MRS CD,Book USC Marshall CDs
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Consumer preferences Books I 1 I 2 -slope at (CD 2 ,B 2 ) = MRS CD,Book USC Marshall CDs
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Constraints Feasible consumption bundles: – The consumer is constrained in his or her choice by the prices he or she faces and the income he or she has Budget constraint: I P X X P Y Y USC Marshall
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Constraints Books ____ budget constraint: Q book = I P CD Q CD ook ook - ____ P book P book feasible consumption bundles USC Marshall CDs
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Consumer choice Optimal consumption bundle: – If both goods are consumed: MRS X , Y MU X MU Y P X P Y – Suppose that for all feasible consumption bundles that xhaust the budget (all money is spent) it is the case I P X X P Y Y exhaust the budget (all money is spent) , it is the case that MU X P X – Then, spend all income on X MU Y P Y USC Marshall
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Consumer choice Books choice suboptimal because could afford more of both USC Marshall CDs
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Consumer choice Books choice suboptimal because even if all income spent, MU CD P CD ___ _______ MU B > P B in consequence, the consumer could buy more CDs and fewer books and be better off USC Marshall CDs
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Consumer choice Books ___ _______ MU CD MU B = P CD P B given I,P CD and P B , optimal choice of books and CDs consumer cannot alter his or her choice and be better off USC Marshall CDs
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Consumer choice Demand functions: – Solving for the optimal choice of X for all ( P , P ,I ) X Y allows us to derive the consumer’s demand function for X – Demand functions capture the consumer’s
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This note was uploaded on 03/09/2009 for the course BUAD 351 taught by Professor Eastin during the Spring '07 term at USC.

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review1 - Midterm Review USC Marshall Overview Consumer...

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