L14 - Economics 101:Principles of Microeconomics Professor...

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1 Economics 101:Principles of  Microeconomics Professor Jo Hertel Lecture 14: Review
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2 Consumer choice First principle of consumer choice: given a budget and prices, the consumer maximizes his utility = he chooses the consumption bundle on the highest indifference curve that is still affordable For ordinary goods: he does this by equating marginal utilities per $ spent across all goods Perfect complements/substitutes: they way he achieves this goal is a little different
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3 The MRS is the slope of the IDC at a given consumption bundle The higher the MRS, the more the consumer values the good on the x-axis! The MRS is also equal to the inverse ratio of marginal utilities: Good A Good B the slope of this line is - q B q A q A q B B A A B q MU q MU =
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4 While at the grocery store, Sidney sees that the price of Grape-Nuts is twice that of Cheerios. If Sidney buys both goods, then Sidney must: A)get twice as much marginal utility from Grape- Nuts as from Cheerios. B)get twice as much marginal utility from Cheerios as from Grape-Nuts. C)not be maximizing her utility. D)buy twice as much Cheerios. Answer: A
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5 Javon is consuming the optimal consumption bundle of lobster and macaroni-and-cheese dinners when he loses his job and has less money to spend on lobster and macaroni-and-cheese dinners. When he adjusts his consumption to reflect the new level of income, his marginal rate of substitution of
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This note was uploaded on 04/01/2008 for the course ECON 101 taught by Professor Hansen during the Fall '07 term at Wisconsin.

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L14 - Economics 101:Principles of Microeconomics Professor...

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