Class02_22

Class02_22 - 02/22/2008 Class Notes (cover part of Chapter...

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Class Notes (cover part of Chapter 7 in the textbook) Class Outline Predictions of Marginal Utility Theory Efficiency, price and value Predictions of Marginal Utility Theory Consider again Peter, he has I=\$30, and consumes Donuts and Beers, whose prices are p’ D =3, p B =\$3, respectively. We already figured that in this case Peter optimally chooses to consume 5 donuts and 5 beers. What happens to Peter’s optimal choice if his available income increases to \$42? the MU per dollar for donuts and beers will not change as both Peter’s preferences and prices have not changed. However, Peter’s set of consumption possibilities is wider. Table 3. Peter’s Marginal Utility per dollar of Donuts and Beers Consumption Possibilities q D MU D /p D q B MU B /p B C’ 2 12.67 12 4.33 D’ 3 11 11 4.6 E’ 4 9.67 10 5 F’ 5 8.33 9 5.33 G’ 6 7 8 5.67 H’ 7 6 7 6 With \$12 more Peter can afford to buy 2 more units of each good. Implication

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This note was uploaded on 04/29/2008 for the course ECON 251 taught by Professor Blanchard during the Spring '08 term at Purdue.

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Class02_22 - 02/22/2008 Class Notes (cover part of Chapter...

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