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lecture6 - demand - handout

lecture6 - demand - handout - Topic 4 Consumer Choice(2...

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1/26/2009 1 Topic 4: Consumer Choice (2) USC Marshal From choice to demand From choice to demand • Having analyzed how consumers choose their consumption bundles, we can now use this framework to – Derive individual demand functions (and curves) from consumer preferences USC Marshal – Analyze the welfare consequences of price changes and other market interventions (next lecture) • How can we derive the consumer’s demand function? – Recall that any interior solution is characterized by From choice to demand MUx x , y MUy x , y Px Py USC Marshal – A demand function simply solves these two equations for all P x , P y and I P x x P y y I

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1/26/2009 2 From choice to demand Q Y I/P Y MRS x,y = = MU x MU y P x P y ____ ___ USC Marshal Q X A I/P X From choice to demand Example: Suppose that a consumer’s utility function is given by so that the marginal utilities are given by U x , y x 1/3 y 2/3 MU 1 y 2/3 and MU 2 x 1/3 USC Marshal Solve for the demand function of product x for this particular consumer. x 3 x y 3 y From choice to demand • Some particular relationships: The price-consumption curve and the demand curve • Tracing out how Q x varies in the consumption bundle chosen by the consumer when P x hh l d i t h t h i t t USC Marshal changes, holding other things constant, we can derive the individual demand curve The income-consumption curve and the Engel curve • As with price changes, we can trace the impact of changes in income on the choice of consumption
1/26/2009 3 From choice to demand The price-consumption curve and the demand curve Q Y I/P Y P X P' X Price-Consumption curve for good X Demand curve for good X USC Marshal Q X I/P' ' X Q' ' X Q X Q' X Q' X Q' ' X Q' ' X P' X P' ' X P' ' X From choice to demand • What else can we learn from the price- consumption curve?

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lecture6 - demand - handout - Topic 4 Consumer Choice(2...

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