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Unformatted text preview: PRELIM 1 Endogenous variable determined within the system Exogenous variable determined outside the system and taken as given, such as prices and income in a consumer utility maximization function Normative vs. Positive which is best vs. what the consequences Determinants of demand income, tastes, prices of substitutes and complements, expectations, and population Determinants of supply technology and factor prices, number of suppliers, expectations and weather Preferences : More of a good is better, transitivity, convexity (mixtures as opposed to extremes), ordinal (preferences can be ranked). M arginal R ate of S ubstitution for x,y is how much x is worth in terms of y o = Marginal Utility from X/ Marginal Utility from Y o = MUx o MUy Perfect substitutes MRS is constant; always willing to trade 1 unit of coffee for 2 of tea o U(C,T) = 2C +T Perfect complements consumed in the same proportion; forms right angle facing up-right Cobb-Douglas will always choose a combination of the two goods Quasi-Linear Revealed Preference a particular bundle with X and Y which provides the most satisfaction for that level of expenditure If MRS X,Y > PX/PY then she should get more X and less Y . Be able to find just as well off as before the price change ch. 4 Price-consumption curve keeping constant the price of other goods, income and preferences see how a change in the price of x affects X consumed Income consumption curve how demand for a good is affected by changes in income (holding prices constant Engle Curve income and quantity demanded for that good (directly related for normal goods; inversely related for inferior goods) Income Effect: results from a change in the attractiveness of other goods; may go either way in response to a price change Substitution Effect: results from a change in purchasing power; always in the opposite direction of a price change. For a normal good (versus an inferior one), income and substitution effects work in the same direction Compensating variation - How much money would the consumer be willing to give up in return for a reduction in price so that she is just as well off as before the price change?...
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- Fall '07