econ111_lecture2 - Econ 111 Microeconomics Spring 2009...

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Econ 111 (Spring '09) 1 Econ 111 Microeconomics Spring 2009 Lecture 2 Individual and Market Demand (Chapter 4) Heiwai Tang
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Econ 111 (Spring '09) 2 Some commonly used utility functions Perfect substitutes: U(x,y) = ax + by MRS = a/b Perfect complements: U(x,y) = min{ax, by} MRS = undefined at the corner Cobb-Douglas (1): U(x,y) = x b y c MRS = (by)/(cx) ( notice decreasing MRS )
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Econ 111 (Spring '09) 3 Numerical Example of Consumer Behavior Ann consumes two goods X and Y, her utility function is U(X,Y)=2XY 2 . Price of X = $10 Price of Y = $15 Ann’s income = $500 (a) Write the expression for Ann’s budget constraint, graph the budget constraint and determine its slope. (b) Determine the X, Y combination which maximizes Ann’s utility, given her budget constraint. And figure out what’s marginal rate of substitution (MRS) between two goods at that maximization point. (c) Suppose now the price of X is changed to $15 , calculate the impact on Ann’s optimum choice. How much will her maximized utility change?
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Econ 111 (Spring '09) 4 Today’s Agenda Tracing out the individual demand curve Normal, Inferior and Giffen Goods Income and Substitution Effects From individual demand to market demand Consumer Surplus Network externality
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Econ 111 (Spring '09) 5 Effect of Price Changes Changing the price of F Keeping income and the price of C fixed, Upper graph: by changing the price of F, the utility-maximizing basket is changing, which traces out the price-consumption curve. Lower graph: the price-consumption relation for good F gives the demand curve, which relates the price of F to the quantity demanded. Tracing out the individual demand curve
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6 Shifting the individual demand curve Effects of Income Changes Different incomes Æ different choices of baskets. Upper graph: the utility-maximizing baskets for different incomes trace out the income-consumption curve. Lower Graph:
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econ111_lecture2 - Econ 111 Microeconomics Spring 2009...

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