Econ100A.Sep20 - Econ 100A - Economic Analysis -...

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Unformatted text preview: Econ 100A - Economic Analysis - Microeconomics Raphal Giraud 1 University of Franche-Comt (France) 2 Visiting Assistant Professor at Berkeley University 3 ragiraud@berkeley.edu Raphal Giraud Intermediate Microeconomics Menu du jour September 20: Consumer Theory: the Demand Function. Readings: PR3 2,3,4,5 Raphal Giraud Intermediate Microeconomics The Demand Function Introduction Considering the consumers preferences as fixed, we have shown in the previous lecture how to derive the optimal bundles chosen by the consumer given prices and income. Although there might be many optimal bundles, for instance in the case of perfect substitutes as we just saw, they are all indifferent (since otherwise one would be preferred to the other and therefore one would not be optimal). We will therefore speak of the optimal bundle without lost of generality. This allows us to define a function that transforms the list of prices and incomes into the quantity of good i contained in the optimal bundle: x i ( p 1 ,p 2 ,I ) = x * i , where x * i is the optimal quantity of good i. This function is called the walrasian (or sometimes marshallian ) demand function . Raphal Giraud Intermediate Microeconomics The Demand Function Introduction The purpose of this lecture is to study (not too formally) the properties of the demand function: How does it vary when income changes How does it vary when price changes. This properties can be seen as consequences of the rationality assumption applied to consumers behavior. Alongside this study, we will have to define different kind of goods. Raphal Giraud Intermediate Microeconomics Properties of the Demand Function No Monetary Illusion As we saw when studying the budget constraint, when prices and income are multiplied by the same constant , the budget set is left unchanged. As a consequence, the optimal bundle is unchanged as well. The following proposition therefore holds: Proposition When prices and income are multiplied by the same constant k > , the demand for good i is left unchanged. This property (that goes by the name degree 0 homogeneity but I dont ask you to remember this term) may be interpreted as showing that rational decision-makers do not suffer from a monetary illusion due to changes in the monetary unit. Raphal Giraud Intermediate Microeconomics Properties of the Demand Function No Monetary Illusion: Evidence The introduction of the euro is a natural experiment to test this prediction of the model. A number of articles on charity donations (Cannon, Cipriani (2003), Kooreman, Faber, Hofmans, 2004) have shown that it led to variations in charity donations to churches (that has usually substantially risen)....
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This note was uploaded on 11/03/2008 for the course ECON 100A taught by Professor Woroch during the Fall '08 term at University of California, Berkeley.

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Econ100A.Sep20 - Econ 100A - Economic Analysis -...

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