review1 - slides

review1 - slides - 3/6/2009 Midterm Review USC Marshall...

Info iconThis preview shows pages 1–5. Sign up to view the full content.

View Full Document Right Arrow Icon
3/6/2009 1 Midterm Review USC Marshal Overview Consumer choice – Utility maximization and competitive demand – Choice under uncertainty Producer choice – Profit maximization and competitive supply USC Marshal Competitive markets – Equilibrium and efficiency – Failure of competitive markets in the presence of externalities Government – Taxes and subsidies 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 USC Marshal – Consumer choice is constrained by the income available and the prices of different goods • Preferences + constraints Æ optimal choice of consumption
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
3/6/2009 2 Consumer preferences A utility function – A preference ordering An indifference curve – Consumption bundles (combinations of X and Y ) that a consumer is indifferent between U U X , Y USC Marshal Marginal rate of substitution – Describes how much the consumer values extra units of X relative to extra units of Y (given a particular initial ( X,Y )) – Describes how much Y should change to compensate the consumer exactly for a given change in X MRS X , Y MU X MU Y Books I 1 I 2 Consumer preferences USC Marshal CDs -slope at (CD 2 ,B 2 ) = MRS CD,Book 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: USC Marshal I P X X P Y Y
Background image of page 2
3/6/2009 3 Books ____ budget constraint: Q book = I P CD Q CD P book P book - ____ Constraints USC Marshal CDs feasible consumption bundles Consumer choice Optimal consumption bundle: – If both goods are consumed: MRS X , Y MU X MU Y P X P Y I P X X P Y Y USC Marshal – Suppose that for all feasible consumption bundles that exhaust the budget (all money is spent) , it is the case that – Then, spend all income on X MU X MU Y P X P Y 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 Consumer choice USC Marshal CDs choice and be better off
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
3/6/2009 4 Consumer choice Demand functions: – Solving for the optimal choice of X for all ( P X , P Y ,I ) allows us to derive the consumer’s demand function for X – Demand functions capture the consumer’s illi t f diff t d d th USC Marshal willingness to pay for different goods and thus represent his or her marginal benefit from consuming additional units of the different goods Consumer choice Elasticities: – Measure the sensitivity of the quantity demanded to changes in its determinants – Own-price elasticity of demand: dQ x d dP x P x Q d USC Marshal x E d 1 demand is elastic 1 demand is unit-elastic 1 demand is inelastic Consumer choice Elasticities: – Cross-price elasticity of demand: • Positive Æ the two goods are substitutes •Negative Æ the two goods are complements dQ x d dPy Py Qx USC Marshal
Background image of page 4
Image of page 5
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 04/19/2009 for the course BUAD 351 taught by Professor Eastin during the Spring '07 term at USC.

Page1 / 19

review1 - slides - 3/6/2009 Midterm Review USC Marshall...

This preview shows document pages 1 - 5. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online