# 3-9-09 - The price of the good on the y-axis is changing so...

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Microeconomics – Class Notes – 3/9/09 EXAM #2 QUESTIONS #1.) He was giving us the value of the bribe for part 1 #3.) Compensating variation – moves us back to original level of utility – how much money do I need to give you in order to put you back at your original utility curve (old prices). Need an extra \$40 Equivalent variation – Raising the price is equivalent to taking away \$24

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QUESTIONS: #8-#11 a.) It’s “a” because the good on the x-axis is the numeraire I am measuring the X-axis in just in terms of dollars The good on the Y-axis is the good that experienced the price changed Going from the inner thick BC to the outer thick BC Compensating variation – how much money do you have to take away from me to get the original level of utility (this shifts the BC inwards) Equivalent variation – lowering the price is the equivalent of giving me how much extra money

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Unformatted text preview: The price of the good on the y-axis is changing, so you have to give me the substitution effect and income effect in terms of the good on the y-axis. 3 CURVES: Total product of labor curve Marginal Product of labor curve Average product of labor curve The slope of the isoquant The Marginal Rate of Technical Substitution (MRTS) – There is always a tradeoff between labor and capital – If I decrease L by 1 unit, how much K do we need to keep output constant? • MRTS- If I decrease the amount of labor by 1 unit, how much capital would I have to hire in order to maintain the same level of output? This isoquant illustrates a diminishing MRTS Returns to Scale- Wednesday HOMEWORK: CHAPTER 6 - STUDY GUIDE : (1-10), (17-30), 33...
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3-9-09 - The price of the good on the y-axis is changing so...

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