ECE1010-03

# ECE1010-03 - UNIT I Theory of the Consumer Introduction...

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UNIT I:Theory of the Consumer • Introduction: What is Microeconomics? • Theory of the Consumer 10/1

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Normal, Inferior, and Giffen Goods Consumer Demand The Determinants of Demand Elasticity Next Time: Theory of the Firm
Last time, we looked at how consumers make optimal choices. A rational consumer will attempt to maximize utility subject to market conditions (relative prices) and income. That is, given I, Px, Py, she chooses X and Y to maximize U. Today, we want to ask, how do changes in prices effect these consumption decisions? X = f(Px). We will see that changes in prices affect quantities through two causal channels: Income and substitution effects .

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Y X Now his wage rises to\$12/hr for the first 40 hrs/wk; it remains \$8/hr above 40 hrs/wk. 1200 960 800 50 60 100 1200 Bullwinkle Moose faces a choice between leisure (X) and income (Y). He can work up to 100 hours a week at a wage of \$8/hr. Initially, he chooses to work 50 hrs/wk. Draw his new budget constraint.
Y X Now his wage rises to\$12/hr for the first 40 hrs/wk; it remains \$8/hr above 40 hrs/wk. 1200 960 800 50 60 100 1200 Bullwinkle Moose faces a choice between leisure (X) and income (Y). He can work up to 100 hours a week at a wage of \$8/hr. Initially, he chooses to work 50 hrs/wk. Will he work more than, less than, or equal to 50 hrs/wk? What is the income effect? His purchasing power is greater, so he will consume more leisure, work less.

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Y X Now his wage rises to\$12/hr for the first 40 hrs/wk; it remains \$8/hr above 40 hrs/wk. 1200 960 800 50 60 100 1200 Bullwinkle Moose faces a choice between leisure (X) and income (Y). He can work up to 100 hours a week at a wage of \$8/hr. Initially, he chooses to work 50 hrs/wk.
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ECE1010-03 - UNIT I Theory of the Consumer Introduction...

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