e100w10_lecture5_topost

e100w10_lecture5_topost - Econ 100 Lecture 5 No office...

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Econ 100: Lecture 5 • No office hours this Thursday (Stevens) • Next problem set will not be due until Thursday (1/28/10)
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What about price changes/subsidies to consumption of particular goods? • Sometimes, government wants to assist with particular types of purchases • Can also do this by providing a tax rebate/deduction based on expenditures for certain goods • EX: Refund of $.30 for every $ spent on prescription medicine, up to $5000
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Rebate on medicine (initially ignore $5000 cap) NM M Slope =-(1-.3)*P m /P nm Initial spending on medicine costs (1-.3)P m
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Subsidy ends after spend >$5000 on Medicine NM M -(1-.3)*P m /P nm -Pm/Pnm Cap on rebate means that if spend lots on M, will eventually go back to original prices
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Find where slope changes back, in terms of units of medicine purchased NM M $5000/Pm -(1-.3)*P m /P nm -Pm/Pnm
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Effectively, reduced price of M leads to increased consumption of M NM M M* NM* M*
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NM M M* NM* In this region, still get increased consumption, but not by as much as previous slide—we’ll see why in next 2 lectures M*’
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Price Changes and Cost-of- Living Indexes • General price level fluctuates (rises) over time, often need to adjust for these differences to make comparisons – Purchasing power of today’s salary in 1990 – Differences across regions of country • Cost-of-Living Index allows this
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Cost-of-Living Index • Definition: Ratio of the present cost of a typical bundle of consumer goods & services compared with the cost during a base period • U.S. Official cost-of-living index is Consumer Price Index – Used to adjust benefit program amounts, tax brackets, social security amounts
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Difficulty in practice with CPI • Two approaches to constructing c-o-l indexes • Laspeyers Index: Amount of $ at current year prices that an individual needs to purchase a bundle of goods and services chosen in a base year divided by cost of purchasing the same bundle at base year prices
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• Paasche Index: Amount of $ at current year prices that an individual needs to purchase a current bundle of goods and services divided by cost of purchasing the same bundle in a base year Difference between the two involves what ―bundle‖ of goods is held constant: current year bundle or base year bundle
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• Difference between these 2 indexes highlights an important problem with price indexes
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This note was uploaded on 02/27/2010 for the course ECN 40279 taught by Professor Annstevens during the Spring '10 term at UC Davis.

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e100w10_lecture5_topost - Econ 100 Lecture 5 No office...

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